US Inflation Data Sent Bond Yields Higher

Market movers today

On the macro data front, the focus remains on inflation signals. The US July PPI is expected to reflect yesterday’s modest CPI print, growing 0.2% m/m both in headline and core terms. We will also keep an eye out for the University of Michigan’s flash August consumer survey, and especially the short-term inflation expectations, which have been on a declining trend this year.

From the UK, the preliminary Q2 GDP estimate is due for release, consensus expects that growth has stopped completely in q/q terms after already weak Q1 (+0.1%).

The 60 second overview

US July CPI came out slightly below expectations with headline at 0.17% m/m (consensus 0.2%) and core at 0.16% m/m (consensus 0.2%). The modest downside surprise was driven by sharper-than-expected deflation in core goods prices (-0.33% m/m; June -0.05%), while our preferred measure for underlying inflation, core services ex. shelter and health care, accelerated after a very low June print (0.45% m/m; June 0.13%). As the Fed focuses more on the services prices, UST yields eventually ended the day higher despite another low core CPI print. But overall, the figures illustrated that broader US price pressures have continued to ease over summer, and while tight labour market remains an upside risk for inflation, we think the latest data generally supports our view that the Fed is already done hiking rates for now.

This morning, there has been modest movements in the Asian market, but the US Treasury market in Asian trade is closed today due to a holiday in Japan.

Oil and gas prices continue to be elevated as the oil price is close to the level seen in early 2023. The gas price has rebounded modestly, but still well above the level before the spike earlier this week.

Equities: Global equities were higher yesterday as US CPI data came in very close to expectation. Simply the fact of inflation coming in as expected should be seen as a positive sign after the extreme inflation surprises we have been witnessing the last 2½ years. No big surprise to see the cyclicals beating defensive and banks/financials doing good with the soft-landing scenario getting some more traction. Growth outperformed value despite yields ending higher, and we are still not back in the more or less 100% yields-dictated rotation between value and growth. In the US, Dow +0.2%, S&P 500 +0.03%, Nasdaq +0.1% and Russell 2000 -0.4%.

Asians markets mostly lower this morning with Japan being closed. European futures are lower while US once are flat.

FI: Global bond yields rose even though the US inflation data suggest that the Federal Reserve will be on hold at the next meeting, but with comments from Federal Reserve’s Mary Daly that inflation is moving the right way, but there is still more work to be done. Hence, the 10Y US government bond yield rose some 10bp and the curve steepened between 2Y and 10Y with 5-6bp.

The spread between 10Y Italy and German government bond tightened another few bp and we are now close to the 150bp level. The Schatz ASW-spread has tightened modestly after the big jump earlier this week. Hence, we are once again seeing a stabilisation in the German ASW-spreads.

FX: The US CPI numbers prompted a knee-jerk yet modest ‘risk on’ reaction in FX space, however this was soon over and reversed. Instead, the dollar had a strong US session alongside higher US rates where NOK was the currency within G10 that took the hardest hit: USD/NOK rose a massive 20 figures to 10.30 whereas USD/SEK advanced 10 figures to 10.70. USD/JPY was up 100 pips and almost pierced 145. Stable markets overnight.

Credit: Credit markets were clearly positive yesterday following the US CPI announcement with iTraxx Main going 2bp tighter to 71bp while Xover tightened by 11bp to 396bp. In addition, primary market activity is gradually picking up steam. An example of good investor appetite was seen when SEB priced a EUR500m 10NC5 Tier 2 instrument at MS+190bp, travelling from IPT of MS+210bp area with books above EUR1bn.