Markets:
- US 10-year yields up 18 basis points to 4.54%
- WTI crude up $1.05 to $86.28
- Gold down $20 to $2,332
- The S&P 500 down 49 points, or 0.9%, to 5,160
- USD leads, AUD lags
Inflation doves were clinging to dwindling evidence of falling inflation ahead of the CPI report and the red-hot numbers dashed their hopes. The chance of a reduction in June has fallen from 55% to 20% and July is now 50/50. The bond market fell and this was further accentuated by a poor sale of the 10-year Treasury.
In the foreign exchange market, the dollar soared on rising rates and further on risk aversion, with AUD/USD down almost 2%. It was a quick move in the headlines, then a sharp move afterward, with almost no pullback or decline. EUR/USD fell 60 pips to 1.0790 initially, then slowly fell to 1.0740. Cable ends the day 160 pips below its pre-IPC levels.
The Bank of Canada’s decision was the other major event of the day and the market was pricing in a 20% probability of decline. Even though the BOC failed to deliver on its promises, there was enough evidence of a reduction in June to satisfy the doves. After the decision, USD/CAD continued to rise, even though the damage to the loonie was about half that to the aussie and kiwi.
In Japan, USD/JPY hit a 34-year high, breaking through the 152.00 barrier. A quick move up to 152.50 on the data and then back to 152.00 was a sign of intervention, as was the lid at 153.00 for most of the day. However, in the last few minutes, 153.00 broke and made a few stops. The Finance Ministry finds itself in a difficult position because the best it can do now is to mitigate the yen’s decline.
Geopolitics also invaded the trading day with growing reports that Iran or its proxies are preparing to attack Israel. Oil had fallen to $84.55, but jumped late to finish at $86.16.
It will take some time to sort out the CPI, but there isn’t much on the calendar that will change the market’s mood. We’ll be watching Fedspeak from the start of tomorrow’s US session with Williams.
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