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5% inflation and yields fall…

June 11,2021 07:30:23

Overnight Headlines

*USD slipped in choppy trade alongside lower Treasury yields

*US equities hit fresh record highs as Fed seen being ultra-accommodative

*Gold back to $1900 as real yields remain deeply negative

US equities made new all-time highs as bond yields fell to three-month lows around 1.43% on the 10-year US Treasury as investors brushed aside concerns about higher inflation. US large caps led the way with a continued rotation into growth and out of value, now seen over the last five days. Asian stock markets are also gaining with US futures slightly higher.

USD trades around 90 in a rather strange session, where both the greenback and EUR ended underperforming among the majors. JPY gained on the move lower in US yields with GBP advancing with its biggest gain in two weeks, along with commodity currencies.

Market Thoughts – Transitory question answered by falling yields

So, US CPI surprised to the upside, rising to 5% y/y and gaining all the headlines with the largest annual gain since August 2008. The monthly increase of 0.6% also beat estimates but a major part of the rise was due to pandemic distortions in light of the reopening of the US economy and base effects. Used cars and airline ticket prices made hefty contributions raising some doubts about underlying inflationary pressures.

The biggest move on the day came in the bond market with short positions being squeezed, yields falling which pushed the dollar lower and commodities higher. With virtually no change in inflation expectations, the Fed’s transitory inflation stance is vindicated for now and the dollar will keeps its soft undertone while the market still believes inflation numbers have peaked and begin falling. Some are querying the details in the report with the core measure, which strips out the volatile elements like food and energy, now at 5.2% on a three-month annualised basis. But for now, investors have apparently concluded that enough inflation is discounted.

Chart of the Day – EUR/CHF nearing support

The ECB raised forecasts and struck a more upbeat tone at its meeting yesterday with the balance of risks now broadly balanced. Inflation rises were downplayed with the 1.4% core projection for 2023 pointing to a very gradual taper. President Lagarde batted away any taper talk although later admitted there were some diverging views on the governing council. In all, it is clear the ECB will continue to facilitate accommodative conditions during the summer.

While EUR/USD still remains stuck around 1.22, EUR/CHF, which we highlighted earlier in the week, has been going lower. The series of lower highs broke support around 1.0930 and we are now approaching a confluence of support with the 200-day SMA, the December 2020 high and trendline support drawn from the May 2020 low all in the 1.0875/90 zone. Expect to see buyers in this area assuming confidence in the growth outlook in the Eurozone is maintained and safe haven demand, in which CHF normally benefits, remains low. If prices mange to break here, the 50% retrace of the May 2020 low to March 2021 high sits around 1.0830 while the breakdown point at 1.0930 is first resistance.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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