Strong Gains In US CPI And PPI Don't Stop The Bond Market Rally


Strong inflation prints this week have not prevented the long-term US interest rates from tumbling. The 10-year yield is about 10 bp lower than where it closed on Tuesday after the lackluster 30-year auction.  

The 30-year yield itself is 11 bp lower. Fed Chair Powell did not break new ground yesterday and insisted that the bar of "significant further progress" has not been met to begin reducing its bond purchases. A possible deal in OPEC saw a sharp drop in crude oil prices, and there is some follow-through selling today.  European yields are lower, though hawkish comments are weighing on UK Gilt prices. Australia's jobs data were also better than expected, and the 10-year Aussie bond yield fell five basis points and is again at a discount to the US. The dollar is mixed against the majors (UDN). The Swiss franc (FXF), sterling, and the yen are faring best. The Antipodeans and Scandis are off by 0.2%-0.3%. Advancing emerging market currencies are being led by South Korea (no change in policy rates at today's meeting) and Taiwan, while the beleaguered rand is leading the losers. The JP Morgan Emerging Markets Currency Index is slightly firmer, trying to post back-to-back gains for the first time in a few weeks. The MSCI Asia Pacific Index rose for the third session this week, despite Japanese and Australian shares not participating.  Europe's Dow Jones Stoxx 600 is threatening to post its second consecutive loss for the first time since mid-June. Nasdaq futures are higher, but the S&P 500 is slightly heavier. Lower yields seem to be aiding gold (GLD), which is seeing follow-through buying after taking out the 200-day moving average (~$1825) yesterday. Gold has advanced in nine of the past 11 sessions. It is oscillating around unchanged levels near midday in Europe. The next upside target is seen near $1845. Copper (JJC) is snapping a three-day slide with a 1% gain. September lumber was at $737 at the end of June and settled yesterday near $612.  The CRB Index fell yesterday (-0.35%) to end a four-day advance.  

Asia Pacific

China's Q2 GDP is not a game-changer.  For a country where the data are often opaque and whose credibility is frequently questioned by outside observers, the market's forecasts tend to be fairly good. The median forecast in Bloomberg's survey was for the world's second-largest economy to have expanded by 1.0% in Q2, and instead, the government showed a 1.3% expansion.  On the other hand, Q1 GDP was revised to 0.4% from 0.6%. June retail sales and industrial output year-over-year were stronger than expected, but the base effect means slower sequentially.  Retail sales were 12.1% above year-ago levels  (12.4% in May and 10.8% expected). Industrial output rose 8.3% year-over-year, off from 8.8% in May, but better than the 7.9% forecast. While fixed-asset investment was consistent with the pattern, property investment missed expectations for a 16% increase and rose 15% (down from 18.3% in May).  The surveyed joblessness remained at 5%, as anticipated. The takeaway is that there is no strong urgency for Chinese officials to change macro policy.  

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Read more by Marc on his site Marc to Market.

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