Thursday was a day that required quite a bit of unpacking. The US CPI stood at 0.3% month-on-month. That was broadly expected, but it was clear that the whisper preceding the number called for a softer outcome; It mainly focused on 0.2%. This leaves us with US CPI inflation in the region of 3.5% to 4% (overall and core).
There are better inflation readings out there. For example, the PCE deflator stands at 2.6%. Additionally, inflation breakevens are significantly closer to 2% (for example, the 10-year breakeven is 2.25%). The latter in particular are more palatable to the Fed’s rate hike ambitions than the consumer price inflation data released on Thursday. But still, the consumer price inflation report was not as good as it could have been. The 10-year US bond reacted, returning to above 4%. But not by much. It was never convincing as it fell back to 4% and went up and down in the 4% to 4.05% area.
Then, a few hours later, we had the 30-year American auction. It was great. No queue, like those that had caused consternation in two of the last three 30-year auctions. It was helped by stable market conditions at the auction. The price was balanced versus secondary. And there was strong indirect supply, which helped minimize pressure on distributors to make any forced recalls. Overall, a sigh of relief. The market thought about it for about an hour and then decided it deserved lower market rates. The US 10-year bond yield fell below 4% again.
So here we are again falling above and below 4%, symptomatic of the price action seen since the beginning of the year. However, it seems that this market does not want to increase performance too much. It seems the rate cut story has been muted, but it remains a dominant factor. At the same time, there is also no mad race for market rates to come down substantially from where they are.
At the same time, there are a couple of geopolitical factors that are also influencing things. First, preparations were made Thursday for attacks against Iran-backed Houthi rebels in Yemen, the source of the Red Sea conflict. There are links here to a broader conflict and many unknowns. Secondly, we approach the key elections in Taiwan over the weekend. As a gut reaction, the thing to do here is buy bonds. The probable duration of these events is short. But of course, it is difficult to predict. That, rather than the 30-year auction, has been the catalyst for lowering yields from a short-term perspective.
As we get closer to Friday, we will get some Eurozone CPI readings that will show consumer price inflation in the 3% to 4% range in countries like Spain and France. This is a reminder of the work that still needs to be done. And then from the US we will have further confirmation of moderate pressure on the pipelines, with the core PPI sitting around 2.5% and the various monthly readings in the 0.1% to 0 range, 2%, where annualizations paint a tolerably moderate picture. for producer price inflation.
Markets are keen to focus on the positives. We find ourselves going against the grain, where we see reasons to be cautious about pricing in cuts too soon. We see good reasons to postpone the next phase of creating a deeper discount on the rate cut. All this is being reflected in the yield of the 10-year US bond, which does not dare to stray too far from 4%.