Markets
US weekly jobless claims are notoriously volatile. Since a couple of weeks, markets took them as a pointer to find the turning point in the US labour market. The same happened the other way around in the early pandemic-days. Relying on a notoriously volatile weekly number implies you create a lot of additional weekly volatility. Especially when you get wrongfooted. Higher-than-expected weekly claims pushed US Treasuries higher the past weeks. Markets expected more of the same yesterday, but claims fell from 265k to 239k (vs 265k expected and lowest in a month) and triggered a sell-off in US Treasuries. Fed Chair Powell on Wednesday obviously created the setting by not ruling out back-to-back rate hikes in July and September, a scenario which wasn’t discounted in US money markets. US yields rose by 9.2 bps (30-yr) to 16.4 bps (5-yr) in a daily perspective, with real yields driving the move higher. The US 2-yr yield (4.86%) rose to its highest level since mid-March and keeps the 5.08% cycle top on the radar. The US 10-yr yield tested the May & June top at 3.86% before closing at 3.84%. A break would be technically significant with the March top at 4.09% as target. German Bunds and UK Gilts sold off in lockstep. German yields added 6.9 bps (30-yr) to 10.6 bps (5-yr). The real interest rate advantage helped the dollar, even as the single currency remains relatively strong on the international scene. EUR/USD closed at 1.0865 from an open at 1.0913. First support at 1.0845 was untested, but needs to be monitored. A break below paints a short term double top on the charts, suggesting a drop in the lower half of the broad sideways channel (roughly 1.05-1.10) in place since the beginning of the year. The mirror move already happened in the trade-weighted dollar index with DXY surpassing 103.17. (US) stock markets were the odd one out yesterday, gaining up to 0.8% for the Dow. The more a potential US recession gets pushed forward, the more equity markets remain bullish. With or without higher real yields. This stretch will crack one day, but we don’t fight the trend.
Today’s eco calendar contains EMU June CPI inflation and US May PCE deflators. National European inflation numbers suggests a close to consensus print (5.5% Y/Y for headline; 6.5% Y/Y for core). PCE deflators the past months deviated somewhat from the earlier released (US) CPI readings, so there’s room for market reaction there. Nearby technical resistance (both in US yields and the dollar) indicate that the surprise should be large enough to force breaks ahead of the weekend. June Chicago PMI’s are also on the agenda.
News & views
Japanese data showed a mixed picture this morning. Tokyo inflation ex fresh food prices, the BOJ’s preferred inflation measure, gained slightly from 3.1% Y/Y to 3.2% Y/Y in June. The increase was mainly due to higher electricity prices as authorities allowed utilities to raise prices this month. Headline inflation eased from 3.2% Y/Y to 3.1% Y/Y. The core measure, excluding fresh food and energy prices also slowed from 3.9% Y/Y to 3.8% Y/Y. All data were slightly softer than expected. Still the outcome keeps the debate open on how much the BoJ will have to raise its inflation forecasts at the July policy meeting and what effect it will have on the Yield Curve Control (YCC). In this respect, BoJ Deputy Governor Himino in an interview with Reuters indicated that price rises are stronger than previously expected. While most inflation is still cost-driven, he also sees factors of demand driven inflation. Other data published this morning showed a bigger than expected monthly decline in industrial production (-1.6% M/M; 4.7% Y/Y), after three consecutive months of positive production growth. The labour market remains tight with the unemployment rate unchanged at 2.6%. USD/JPY this morning briefly surpassed the 145 barrier as markets look out for signs from the Ministry of Finance on potential interventions.
Chinese economic momentum slowed further in June. The composite PMI declined from 52.9 to 52.3. The manufacturing index remains slightly in contraction territory (49 from 48.8). The services measure fell more than expected from 54.5 to 53.2. Subindices for employment and exports orders decreased further. New overall orders gained marginally (48.6) but stay in contraction territory. The data reinforce market speculation of further stimulus to support activity. The yuan remains in the defensive with USD/CNY trading near 7.25.
