The bond market wakes up. US 10-year yields hit the highest since Aug 13

Taper back on the table?

Taper back on the table?
There’s a sweet spot for many markets where delta pushed back the taper but the economy remains solid and rates stay low.
Of course, that’s an impossible paradigm to hold. Yes, Powell probably won’t signal a taper this week but beyond that either delta will meaningfully hurt the global economy or delta will fade and the case for tapering will return.
At the moment, the bond market appears to be hinting at a fade in delta and rising odds of a September taper. Overall, I suspect this is more about delta and confidence this round of cases will fade quickly but I see the Fed argument too.
From where I stand, Powell’s best course of action is to preserve some optionality into the Sept meeting but emphasize that the Fed will do everything it can to support the recovery. Ultimately, a November taper hint and December announcement makes the most sense.
Despite the uptick in rates, the bond market certainly isn’t seeing any inflation.

European major indices close modestly higher

German Dax lower, France’s CAC higher

The major European indices are ending the session with modest gains

  • German DAX, -0.3%
  • France’s CAC, +0.2%
  • UK’s FTSE 100, +0.3%
  • Spain’s Ibex, +0.3%
  • Italy’s FTSE MIB, unchanged
In other markets as European/London traders look to exit
  • Spot gold is down $-15.68 or -0.87% at $1786.26
  • Spot silver is down -$0.12 or -0.52% $23.68
  • WTI crude oil futures are trading up about $0.10 or 0.13% at $67.70.
  • Bitcoin is trading up $682 and $48,413
In the US stock market, the S&P index traded to a new all-time high. Both the S&P and NASDAQ index or on track for a record close today (although gains are limited). The Dow industrial average has erased earlier declines in trades near session highs.
  • Dow industrial average is up 83.3 points or 0.24% at 35452. The index was down -78.63 points at its low.
  • S&P index is up 9.76 points or 0.22% at 4495.96. That is near the high for the day at 4496.11
  • The NASDAQ index is up 17.29 points or 0.12% 15037.28. The high for the day reached a new all-time intraday record at 15052.20.
In the US debt market, yields have moved higher, with the 10 year moving up to 1.342% at its highs. The low today reached 1.283%:
German Dax lower, France's CAC higher_
A snapshot in the forex market now shows the NZD as the strongest of the majors, while the JPY is the weakest. The USD has been sold vs the EUR and GBP over the last few hours of trading and in the process worked back toward the highs for the day in what has been an up and down day for those pairs. The USD is stronger versus the JPY as that pair reacts to the higher yields.

US dollar catches a bid to hit session highs versus JPY, EUR and GBP

Dollar bids coming through

It’s tough to find a fundamental underpinning to the latest move in the US dollar. It’s more likely flows or position squaring ahead of Powell.
IF anything, the bond market is dollar negative at the moment as US 10-year yields trail down to 1.299% from 1.310% earlier and that brings rates to flat on the day.
Perhaps that’s some risk aversion creeping in but it’s tough to find much evidence.
The core durable goods orders were a touch soft but that was mostly washed away by revisions to the June data.
In any case, the dollar is at the best levels of the day against the euro, pound and yen after 10-15 pip moves in the past 15 minutes.
So far, cable is holding yesterday’s low:
Dollar bids coming through

Ifo economist says 70% of industrial businesses complain about supply chain bottlenecks

Remarks by Ifo economist, Klaus Wohlrabe

  • Trade index has also fallen, traders were less satisfied with their current business
  • Export expectations have fallen but remain at a relatively good level
  • 1/2 of companies in manufacturing, retail want higher prices to cover rising costs
As much as this is a hit to economic expectations as it will weigh on business sentiment, this is also part of the inflation debate as mentioned yesterday here.
This is going to be a major problem that will persist for many more months to come.

Macquarie on the risk of a lower yuan given new constraints on China capital control measures

Article (link below) on potential capital outflows out of China ahead, highlighting China being reluctant to implement capital controls and lose some of the gains of market opening:

  • with stronger capital constraints now less likely, something else will have to budge 
  • “China can use the exchange rate to deal with the external pressure,” said Larry Hu, China economist at Macquarie Group Ltd. “If the dollar strengthens, the yuan can weaken to absorb the shock.”
  • Depreciation would be risky, putting more pressure on already credit-strained Chinese companies with dollar-denominated debt and also running the risk of a self-reinforcing cycle of capital outflows
Info comes via a Bloomberg piece (may be gated)
Yuan (CNH shown in chart) does have room to depreciated, its strengthened since mid-2020.

Article (link below) on potential capital outflows out of China ahead, highlighting China being reluctant to implement capital controls and lose some of the gains of market opening: 

S&P and NASDAQ close at record highs

Russell 2000 leads the way with a gain of 1%

The S&P and NASDAQ are both closing at record high levels.

  • S&P and NASDAQ up for the fourth consecutive day
  • Russell 2000 leads Way with a 1% gain
  • Dow rises for the second consecutive day
  • NASDAQ index closed above the 15,000 level for the first time ever
  • Energy (+1.7%), discretionary and materials led the gains
  • Consumer staples (-0.8%), real estate (-0.7%), utilities (-0.7%) saw the declines
The final numbers are showing:
  • Dow industrial average rose 30.55 points or 0.09% at 35366.26
  • S&P index rose 6.7 points or 0.15% at 4486.23
  • NASDAQ index rose 77.14 points or 0.52% at 15019.79
Meme, Chinese companies and reopening stocks did better:
  • Game Stop, +27.66%
  • AMC +20.15%
  • AirBNB, +9.89%
  • BlackBerry, +9.62%
  • Tencent, + 9.26%
  • Robinhood, +8.85%
  • Crowdstrike, +8.07%
  • Alibaba, +6.6%
  • Goodrx, +5.74%
  • Roblox, +4.92%
  • FireEye, +4.72%
  • Koss, +4.64%
  • Bed Bath & Beyond, +4.53%
  • Southwest they are, +4.31%
  • Chewy, +4.29%
Losers included:
  • Traeger, -9.49%
  • Novavax, -7.09%
  • Moderna, -4.11%
  • Pfizer -3.10%
  • Western Digital -2.39%
  • Uber,-2.05%
  • General Mills, -1.96%
  • First Solar, -1.6%
  • snap, -1.15%
  • AMD, -1.03%
  • Home Depot, -0.9%
  • Nvidia, -0.77%
  • Costco, -0.71%
  • Microsoft, -0.65%
  • Gilead, -0.41%
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