• FOMC member Bullard join the hawkish parade kickstarted by Daly, Mester and Evans yesterday. This morning he reiterated his views of a policy rate at 3.75-4% by the end of the year and said there’s a need to get into more restrictive territory. During early US dealings he doubled down in another speech, saying rates may need to be higher for longer to ease inflation. It’s a sneer towards money markets pricing in rate cuts as soon as the first quarter of next year. We’re looking forward to the remaining flurry of speakers scheduled for today. The string of recent Fed comments in any case forces bond markets right now to rethink their extremely dovish repositioning over the course of June and July. After the impressive bear flattening yesterday, US yields extend a rebound north today. Changes go from 2.1 bps in the 30y to 4.7 bps in the 2y with Fed rate hike expectations changing mainly for 2023 (ie pricing out rate cuts). The 10y yield adds 2.5 bps to be a bit more comfortable above the 2.70/72% support zone. German Bunds underperform as they catch up with USTs having extended a drop after the European close yesterday. The curve bear flattens as well, printing gains from 2.4 bps (30y) to 6.1 bps (2y/5y). European swap yields have a decent run as well, rising 4.2 to 4.6 bps at the front end of the curve. The 10y yield, just as is the case for Germany, finds the way back higher within the downward sloping trend channel. Today’s move in yields is also supported by commodity prices with the likes of oil snapping higher (see headline below) and – maybe – with some of the geopolitical tensions easing after Pelosi left Taiwan and a harsh Chinese response so far remains absent. Equity markets hold on tight. Core bond yields advance but the orderly fashion allows for the general risk-on mood to prevail for risky assets. US stocks open with gains ranging 0.4% (DJI) and 0.8% (Nasdaq). The Eurostoxx50 adds 0.70%.
• Currency markets trade relatively quiet. Both the dollar and the euro performed mixed against G10 peers. Put against each other, EUR/USD is going nowhere around 1.017 as a result. The pair tried to recoup some of the losses yesterday but they evaporated as today’s session evolved. The trade-weighted USD (DXY) sought to extend yesterday’s bounce off the 105 barrier but the move ran into resistance soon. It’s now holding steady around Tuesday’s close at 106.22. The Japanese yen took a breather after its recent surge. Rising core bond yields help USD/JPY and EUR/JPY higher to the 133.65 and 135.92 area respectively. A bit of nervousness is creeping into sterling now, going into the monetary policy meeting of the BoE tomorrow. The influential think tank NIESR painted a gloomy picture of the UK economy, calling it already in a recession with a stagflationary outlook, and probably weighed on the British currency too. EUR/GBP ekes out a gain to 0.837. Cable (GBP/USD) stabilizes around 1.215.
• Turkish inflation rose to a new 24-y high as prices rose 2.37m/m to be up a whopping 79.60% y/y with the July reading even weighed down by a monthly drop in transportation costs (-0.87% m/m). It’s an acceleration from the 78.62% last month and only marginally below the 80.24% analysts were expecting. Core inflation quickened from 57.26% to 61.69% y/y. It’s believed that price pressures in Turkey have yet to peak with the country’s central bank holding rates at a way-too-low policy rate of 14%. With real rates this negative, it is still supporting growth and thus inflation. Instead, Turkish authorities rely on macroprudential measures but without much success so far. The Turkish lira loses ground against the euro (EUR/TRY 18.30) and the dollar (USD/TRY trending to 18).
• OPEC+ agreed on a minor and rather symbolic production increase for September at their meeting today, delegates said. An additional 100k barrels/day would hit the markets after the oil cartel fast-tracked the reversal of their Covid-era production curbs in July and August. The small output bump is designed to keep a balance between consumers suffering from high energy prices and the looming threat of a recession in areas including the US and Europe that may sap demand hard and fast. There were no discussions about whether to keep raising production beyond September. Oil prices advanced after the meeting. Brent oil is trading at $101.75/barrel.