by Adam Button
Fresh declines in US bond yields were boosting gold and silver ahead of the US CPI release yesterday. The grind higher in risk trades continued on Monday as US stocks hit fresh records. JPY and AUD were the only gainers vs. USD, with GBP and CHF on the backfoot.
The big challenge loomed with June US CPI. DOW Futures were the weakest performers as the descent in yields weighed on financials and NASDAQ turned the other way.
See yesterday's 10-year chart here as 1.40% becomes the new ceiling.
Monday's price action offered more evidence that last week's test of nerves was passed. US equities started soft but soon gained momentum, in part due to rising yields. The 10-year auction yield was 0.3 bps below expectations and that briefly caused a ripple in rates as well USD/JPY, but it was soon brushed aside.
Commodities and commodity currencies showed some resilience as well with oil shrugging off earlier losses. Copper quickly became a forgotten market, but it's held steady at historically-high levels over the past month.
Looking ahead, there's the scope for considerable volatility following the release of the June US CPI report. Beyond that, the details of the report were critical. The market had a good idea of what components of CPI will be shrugged off by the Fed—used autos, travel, durable goods—and which ones may not be: owners equivalent rent, some services.
It will be key to watch the bond market reaction. After the surprise jump in May CPI, yields on the long end of the curve fell. The implication is that higher rates now may force the Fed into a policy error and doom long-dated bonds to sub-2% returns.
Conversely, it would have been interesting to see the market reaction if there was a lower-than-expected reading because that would have provided cover for the Fed to be patient, meaning possible higher yields.