US Yields Stabilize After Falling To Three-Month Lows

America

The larger than expected rise in US May CPI did not derail the bond rally. The bulk of the rise appears attributable to sectors that reinforce the sense that it is being driven by temporary factors adjusting to the re-opening and some supply disruptions. Used car prices rose by 7%, and this alone accounts for around a third of the headline increase. Airfare also rose sharply. Hotel accommodations, auto insurance, and restaurant prices also rose after being depressed by covid. The 10-year breakeven is around 235 bp. It peaked in mid-May near 260 bp. The five-year five-year forward is around 237 bp. It peaked in mid-May a little above 270 bp.  

An increasing number of observers are warning that next week the FOMC could announce that it will begin discussing tapering.  And ideas that it could adjust the interest it pays on reserves and/or the reverse repo has begun to impact the bill auctions. For example, yesterday's sale of four-week bills produced a yield above zero for the first time in a month.  

The North American economic calendar is light today. The US features the June University of Michigan's consumer confidence and inflation expectations. Recall that last month, the 5-10 year inflation expectation rose to 3% from 2.7%-2.8% that has prevailed so far this year. Although Fed officials often talk about inflation expectations, the shift in emphasis has been to actual performance rather than projections. Mexico reports April industrial output figures and a 0.3% rise is expected after a 0.7% gain in March.  

The US dollar is virtually unchanged against the Canadian dollar through the European morning around CAD1.2100. Two chunky options expire today:$1.66 bln at CAD1.2090 and the other for a little more than $600 mln at CAD1.2085. A move above the CAD1.2145 area will likely trigger stop-loss US dollar buying. The greenback finished around CAD1.2085 last week. The US dollar remains within Wednesday's range against the Mexican peso (~MXN19.60-MXN19.79). It is around the middle of the range and looks poised to test the lower end of the range. At the end of last week, on the eve of the legislative and local elections, it settled a little below MXN20.00. 

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Read more by Marc on his site Marc to Market.

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