A look ahead for the day ahead in the US and global markets by Mike Dolan
The bond market storm of the last week calmed somewhat on Monday but the interest rate horizon is now heavily dependent on signs of further disinflation as economic activity and the labor market hold up so well.
With Wednesday’s US CPI report expected to show headline inflation falling nearly a percentage point to just 3.1% last month, China joined in the disinflation chorus on Monday — and perhaps more than it would like, given deflation there is now a real problem.
Ex-factory prices in the world’s second-largest economy fell in June, the most sharply on an annual basis in over seven years, and there was no annual consumer price inflation at all – a deflationary warning that calls for policy stimulus measures to be revealed.
While this is a concern for China, it should help ease inflation concerns elsewhere in the world.
Despite Friday’s U.S. jobs report for June showing the lowest monthly wage increase in two and a half years, the still strong 200,000 job gains pushed the unemployment rate back down to just 3.6% and annual wage growth picked up to 4.4% .
While this data softened the previous day’s sizzling private sector payrolls, it left a beleaguered bond market still skeptical about further rate hikes by the Federal Reserve and praying that disinflation could end after another rate hike later this month.
Although government bond volatility (.MOVE) slipped from a six-week high on Friday, its weekly rise was the sharpest since March’s bank stress-related wild swings.
Although another quarter-point hike by the Fed is now scheduled for the July 26 meeting, futures markets have pushed back expectations for another such move through November and now see a less than 50/50 chance of a second rate hike this year Year.
The 2-year Treasury yield fell back below 5% on Friday and stayed there today. However, 10-year bond yields remained above 4% and the 2-10 year bond yield curve steepened, reaching the lowest inverted level in almost a month.
The bond market’s tentative stabilization hasn’t calmed jittery stocks, however, and the start of corporate second-quarter earnings season this week, which is expected to see another annual decline in overall S&P500 earnings, adds another risk factor.
Stock futures were down again ahead of Monday’s open, despite gains on the Chinese and European bourses. The VIX index (.VIX) of stock market implied volatility remains above 15.
The dollar (.DXY) rebounded after its swoon over Friday’s payroll. The offshore Chinese yuan eased slightly.
Treasury Secretary Janet Yellen ended her visit to China without any notable breakthroughs in the thorny trade and industrial disputes between the two economic superpowers. President Joe Biden visited the UK ahead of this week’s NATO summit in Vilnius.
UK markets – where last week’s sell-off in UK government bonds was worse than government bonds – remained nervous. A bearish statement on UK property from HSBC weighed on the sector, dragging property mutual funds (.FTNMX351020) and property stocks (.FTUB3510) down 0.4% each.
Treasury Secretary Jeremy Hunt will set out long-awaited plans on Monday to encourage pension funds and other wealth managers to invest in high-growth sectors and private equity, the Treasury Department said on Sunday.
Bank of England boss Andrew Bailey will also speak on Monday.
In South Korea, banks became even more nervous as the Financial Services Regulatory Authority asked major commercial banks to prepare around $4 billion in funding to support a credit union hit by customer withdrawals.
Events to watch out for later on Monday:
* US consumer credit in May, employment trends in June
* Federal Reserve Vice Chairman for Oversight Michael Barr, San Francisco Fed Chair Mary Daly, Cleveland Fed Chair Loretta Mester and Atlanta Fed Chair Raphael Bostic all speak; Andrew Bailey, Governor of the Bank of England, speaks
* US President Joe Biden visits Britain ahead of NATO summit
* The US Treasury sells 3 and 6 month notes
Reuters GraphicsInflationReuters Graphics Reuters GraphicsReuters GraphicsDespite the Russian invasion of Ukraine, 12 Alliance member countries reduced their defense spending as a percentage of gross domestic product (GDP) in 2022 from 2021, while seven, including the US, hit the lowest level in three years.
By Mike Dolan, edited by Ed Osmond, [email protected]. Twitter: @reutersMikeD
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