Well, I’d say “it’s quiet out there,” but that’s cliché.
So how about this: “ain’t shit shakin’ but the leaves in the trees“.
Ok, maybe a few things happened while you were asleep. But not much. Let’s walk through some things.
We got China PPI and CPI, with the former printing +5.5% for June, in line with estimates and unchanged from May and the latter coming in at +1.5%, a shade below consensus.
As a reminder, the disparity between PPI and CPI inflation has been in focus for quite some time in China. Additionally, the CPI print isn’t going to do much to encourage central bankers who are looking everywhere for signs of inflation:
“Year to date, CPI inflation has been mild, primarily on a drag from low food inflation. Although vegetable prices have picked up recently, pork prices continued to fall, which might weigh on CPI inflation in the near term,” Goldman wrote overnight, adding that “although PPI inflation was steady in June in year-over-year terms, we continue to expect a downward trend in the next few months.”
“Producer price inflation has already declined from a rate of 7.8 percent year-on-year in February to 5.5 percent year-on-year by June as global raw materials prices have moderated,” said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit in Singapore. “A further slowdown in producer price inflation is likely in coming months.”
Speaking of inflation, Norway’s June underlying CPI came in at 1.6%, handily beating the estimate (1.4%). That’s actually more significant than it sounds. Remember, with the Scandies removing their easing biases, we need these kinds of beats to justify the hawkishness.
“The weakening of NOK so far this year indicates that the downturn for imported inflation may eventually halt somewhat,” DNB economist Knut Magnussen notes (see right pane below):
That presents something of a paradox, as these kinds of hot prints will invariably push EURNOK sharply lower:
Meanwhile, USD/JPY rose for a second day after Kuroda reiterated that the BoJ is readily and willing to tweak its policy as needed following its intervention last week to cap rising 10Y yields.
In other words: the yen will continue to trade in lock-step with US 10Y yields. Remember what we said last Thursday? Here’s a reminder:
Also note that as JGB yields drift higher, it makes yield differentials a two-way street again for USDJPY which, under YCC, pretty much just tracks UST yields because JGB 10Y yields can’t move.
Well, with the BoJ moving in on Friday to put a lid on JGB yields, that means there is no two-way street. “The recent moves in the yen are largely a response to BOJ’s tone,” said Daniel Been, head of foreign-exchange research at Australia & New Zealand Banking Group Ltd. in Sydney. “Its resolve to maintain, and demonstrate its commitment to the yield curve control in the face of a number of other global central banks turning more neutral, once again highlighted the yen is completely beholden to the U.S. 10- year yield.”
Right. Although that relationship broke down this morning, after a large block trade in bund futures triggered a rally that spilled over into US yields.
Anyway, it looks like the BoJ may now have to fight to contain 5Y JGB yields, which speaks to the notion that you can’t just cap one maturity when that maturity is itself influenced by other factors.
“BOJ battleground for capping yields could be shifting to 2- and 5-year bonds as rising yields for the maturities helped push up those on 10-year securities last week,” Satoshi Shimamura, head of rates and markets for the investment strategy department at MassMutual Life Insurance said on Monday, adding that “as foreign demand for medium-maturity JGBs shrinks, the 5-year yield climbs above -0.04% level where BOJ held fixed-rate operation in November.” So that’s something to watch moving forward.
Oh, and gold is sitting at a 4-month low.
“Gold remains under pressure on increased talks that major central banks will embark on monetary tightening measures,” Madhavi Mehta, an analyst at Kotak Commodity Services in Mumbai told Bloomberg overnight. “FOMC minutes showed that Fed officials are divided on monetary policy stance but this was more than offset by U.S. non-farm payrolls data.”
Here’s a snapshot of global equities, which are higher pretty much across the board:
- Nikkei up 0.8% to 20,080.98
- Topix up 0.5% to 1,615.48
- Hang Seng Index up 0.6% to 25,500.06
- Shanghai Composite down 0.2% to 3,212.63
- Sensex up 1.1% to 31,697.52
- Australia S&P/ASX 200 up 0.4% to 5,724.44
- Kospi up 0.09% to 2,382.10
- FTSE 7359.85 8.93 0.12%
- DAX 12441.08 52.40 0.42%
- CAC 5157.83 12.67 0.25%
- IBEX 35 10466.30 -22.50 -0.21%
