ON DECK FOR WEDNESDAY, JUNE 26
KEY POINTS:
- Bonds slightly cheaper, equities little changed…
- …on light macro developments
- Markets shouldn’t treat inflation risk in Canada/Australia as portable into US, Europe
- Australia’s rates spike, A$ outperforms after another hot inflation report…
- ...that feed RBA hike risk
- Canada quiet ahead of tomorrow’s 2s, Friday’s GDP…
- …as markets assign low odds to a July BoC cut
- US auction risk continues, new home sales on tap
It’s a light session by way of fresh macro developments that has sovereign bonds broadly cheaper, equities little changed, and the dollar broadly stronger. The catalysts are not clear in my opinion. There was a slight cheapening bias in US Ts before hot Australian CPI landed and drove further cheapening.
Nevertheless, to pin slightly cheaper US Ts this morning on Australian and Canadian inflation data suggests markets are applying some casual empiricism if they think that the unique drivers of US inflation have something in common with those two other countries at this point in the cycle. During the pandemic, the challenges facing global supply chains drove more correlated global inflation risk. Right now, I think inflation risk is more idiosyncratic and market-specific such that it’s more likely that what happens in places like Canada and Australia is more likely to stay in Canada and Australia rather than being treated as portable risk into places like Europe and the US.
RBA HIKE PRICING INTENSIFIES AFTER HOT CPI
Australian monthly inflation surprised higher and that drove serious underperformance by Australia’s rates curve and a stronger A$. The real test will come on July 30th when full Q2 Australian CPI figures are released since RBA Governor Bullock has put significant emphasis upon that report in terms of potential hike risk.
For now, May’s CPI was up 4% y/y (3.8% consensus, 3.6% prior) and key was that the trimmed mean CPI measure climbed to 4.4% and has been on a steady upward trend this year (chart 1). Higher frequency m/m core (not trimmed mean) inflation at a seasonally adjusted and annualized rate was 4% and hence remains materially above the RBA’s 2–3% inflation target range (chart 2). In Australia’s case, trimmed mean CPI takes the middle 70% of the CPI basket and trims out the tails to focus more closely upon central tendencies (Canada takes the middle 60%).
The result pushed August RBA hike pricing about 7bps higher to a still slim 8bp and added 7–8bps to September pricing which is now a 50–50 call (chart 3). Australian 2s cheapened by 18bps and 10s were up 11bps while the A$ is outperforming almost all major and semi-major crosses this morning.
RISING PRESSURE ON FUTILE YEN INTERVENTION
The yen continues to soften on a morning of broad-based USD strength and is now at 160. That will put more pressure upon the MoF to intervene. And they’ll fail. Again. One-sided intervention against fundamental macro drivers can only at best temporarily manage a currency but without lasting consequences.
LIGHT US DEVELOPMENTS
US auction risk continues with 2-yr FRN (11:30amET) and 5-year Ts auctions (1pmET).
US new home sales may face downside risk given the correlations with model home visits that have been weakening (10amET).
MARKETS LARGELY WIPED OUT JULY BOC CUT PRICING
There is nothing out in Canada today ahead of tomorrow’s 2s auction in the wake of yesterday’s hot CPI, and Friday’s GDP figures. Markets now see only 6bps of a cut priced for the BoC’s July 24th decision, down from about 15bps of a cut priced before yesterday’s CPI figures (reminder recap here). A lot of data is still ahead before the next decision including another CPI report, the BoC’s surveys of businesses and consumers including measures of inflation expectations, a jobs report, and both April and May GDP estimates.
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