Yields ease on solid demand at Treasury bond auction

NEW YORK – Treasury yields slipped on Thursday amid relief that all USD 125 billion in new note and bond supply this week was absorbed smoothly, allowing traders to focus on pivotal inflation reports for the Federal Reserve’s higher-for-longer rate strategy.

The Treasury sold USD 25 billion in 30-year bonds on Thursday, at a high yield of 4.635%, lower than where the yield on the screens was at the close of competitive bidding, indicating strong demand.

A bid-to-cover ratio of 2.41 was higher than the market was expecting, according to Subadra Rajappa, head of US rates strategy at Societe Generale, New York.

The 30-year yield fell after the auction, showing the result was well received, and was last down two basis points from late Wednesday at 4.6116%.

“We actually had a pretty decent 30-year auction, all things considered,” Rajappa said. “This whole week has been pretty much about Treasury supply and corporate supply. It’s a wait-and-see game until CPI next week.”

The government got solid interest at a USD 42 billion auction of 10-year notes on Wednesday and a USD 58 billion sale of three-year notes on Tuesday.

The April Producer Price Index report comes on Tuesday, and the closely followed Consumer Price Index next Wednesday. Combined they will provide insight on whether inflation has resumed its downward trend toward the Fed’s 2% target rate.

“There is a reason the CPI has supplanted the employment report as the biggest market mover on the economic calendar,” said Chris Low, chief economist at FHN Financial in a daily client note. “As we try to anticipate how the Fed conversation will evolve next, it will depend more than anything on what CPI inflation does next Wednesday.”

Yields firmed a smidge after San Francisco Federal Reserve President Mary Daly echoed statements by Fed officials earlier in the week, saying during afternoon trade that there is “considerable” uncertainty about where US inflation will head in the coming months, while adding she still has faith that price pressures are continuing to ease.

In early trade, benchmark yields briefly dipped after news that initial claims for state unemployment benefits increased 22,000 to 231,000 last week. That was higher than the 215,000 expected by economists polled by Reuters and could be good news for the Fed as further evidence that inflationary labor-market tightness is ebbing.

“If you just read it on the surface, it looks like one of the uglier numbers that we’ve seen in the last several months,” said Thomas Simons, a money market economist at Jefferies in New York, but “volatility around the first of the month is not unusual.”

Yields fell hard on Friday after April payrolls came in below expectations. That followed the Federal Open Market Committee meeting, where it held rates steady but said it still expects a rate cut to be its next move even as inflation remains stubbornly high.

Traders are pricing in the probability of two 25 basis point cuts this year, with the first expected in September, but any cuts will likely depend on whether inflation can resume its easing trend.

The benchmark 10-year note yield was last off 2.6 basis points at 4.457%. On Tuesday it hit 4.42%, the lowest since April 10

Two-year yields, which typically move in step with interest rate expectations, fell 2.8 basis points to 4.8154%, remaining in a range since Friday’s fall to 4.806%, their lowest since April 5.

The inversion in the yield curve between two-year and 10-year yields deepened almost two basis points to minus 36 basis points.

(Reporting by Alden Bentley and Karen Brettell; Editing by Jonathan Oatis and Nick Zieminski)

Oil edges up to one-week high on rising demand hopes after China, US data

NEW YORK – Oil prices edged up to a one-week high on Thursday on data from China and the US signaling demand in the world’s two biggest crude-consuming nations could climb.

Brent futures rose 30 cents, or 0.4%, to settle at USD 83.88 a barrel, while US West Texas Intermediate crude rose 27 cents, or 0.3%, to settle at USD 79.26.

That was the highest close for both crude benchmarks since April 30.

Limiting those price gains was US energy data showing gasoline and diesel demand last week was the weakest since the 2020 coronavirus pandemic.

“Oil prices traded in a very tight range. There’s not a lot of oil news out there. The geopolitical news from the Middle East is in the background and it’s unclear,” Phil Flynn, an analyst at Price Futures Group, said of the small changes in crude prices.

In China meanwhile, crude oil imports rose on the previous year in April and exports and imports returned to growth last month, indicating an increase in demand at home and overseas as Beijing moves to shore up a shaky economy.

“The improved China trade balance data added to the upside momentum,” said Tina Teng, an independent market analyst.

In the US, the number of new claims for unemployment benefits rose last week to the highest in more than eight months, further evidence that the labor market was cooling.

Analysts projected that ebbing labor market momentum puts two interest rate cuts from the US Federal Reserve this year back on the table.

Lower rates would reduce borrowing costs and could spur economic growth and demand for oil.

The Bank of England took another step toward lowering interest rates as a second official backed a cut and Governor Andrew Bailey said he was “optimistic that things are moving in the right direction”.

MIDDLE EAST TURMOIL

Israeli tanks and warplanes bombarded areas of Rafah, Palestinian residents said, after President Joe Biden said the US would withhold weapons from Israel if its forces mount a major invasion of the southern Gaza city.

“If the Biden boycott spurs the Israelis to sign a ceasefire deal with Hamas, then WTI crude oil could potentially squeeze another USD 10 (a barrel) of geopolitical risk premium out of the market,” Bob Yawger, director of energy futures at Mizuho, said in a note.

“However, if Iran becomes emboldened by the US stance and jumps back into the fray after keeping (a) low profile for weeks, then the market could rally back to multi-month highs,” Yawger added.

In response to Israel’s latest operation, the leader of the Houthis in Yemen said the Iran-backed group, which has already disrupted shipping in the Red Sea, would target ships of any company related to supplying or transporting goods to Israel.

(Reporting by Scott DiSavino in New York, Paul Carsten in London, Deep Vakil in Bengaluru, Laila Kearney in New York, and Emily Chow in Singapore; Editing by Mark Potter, Kirsten Donovan, Marguerita Choy, and Jan Harvey)

Markets up but lacking oomph, China inflation looms

Asian markets are poised to round off the week on a positive note on Friday, supported by gains on Wall Street, a weaker dollar, and falling Treasury yields the day before.

But momentum looks sluggish, and if anything, investors in Asia are more likely to end the week with a limp over the finishing line rather than a burst of bullish optimism.

The local economic calendar is pretty full, with New Zealand manufacturing PMI, industrial production from India and Malaysia, and household spending, bank lending, trade, and current account data from Japan all on tap.

Of the Japanese numbers, household spending is perhaps the most important, with investors looking for signals on how strong inflationary pressures are. The consensus forecasts point to monthly and annual declines in March.

Japanese policymakers appeared to take a hawkish turn at the Bank of Japan’s last meeting, however, with some board members seeing the chance of interest rates rising faster than anticipated.

Someone forgot to alert the FX market though – the yen didn’t get any obvious lift on Thursday, is hovering around 155.50 per dollar, and is down 1.5% this week.

Perhaps the most important economic data point of all comes on Saturday, when China releases April inflation. Economists polled by Reuters expect annual producer prices to remain deep in deflationary territory, and annual consumer price inflation to be barely positive at 0.1%.

China has been battling consumer deflation for about a year but it’s a fight Beijing is struggling to win – producer prices have fallen on a year-on-year basis every month since October 2022, and there is no sign of that changing any time soon.

China’s economic recovery is progressing in fits and starts. Figures on Thursday showed a welcome rebound in trade activity in April with imports and exports swinging back to growth. Imports were much stronger than expected.

But other indicators have been less encouraging, and Citi’s economic surprises index is at a three-month low. Some analysts are speculating Beijing could end up driving down the yuan to engineer a sustainable recovery.

A devaluation of any magnitude is not without risk and may never come to pass. But the yuan is under pressure against a buoyant dollar and while capital outflows have slowed sharply, inflows have yet to meaningfully pick up.

Sino-US trade relations continue to deteriorate, and on Thursday the Biden administration added 37 Chinese entities to a trade restriction list, including some for allegedly supporting the spy balloon that flew over the United States last year.

On the corporate front, Taiwan chipmaker TSMC, the world’s largest contract chipmaker, is expected to release its monthly sales figures on Friday, and in Japan automakers Honda and Mazda are among the firms reporting full-year earnings.

Here are key developments that could provide more direction to markets on Friday:

– Japan household spending (March)

– India industrial production (April)

– New Zealand manufacturing PMI (April)

(Reporting and Writing by Jamie McGeever; Editing by Josie Kao)

Why China’s tolerance for a cheaper currency may be temporary

SHANGHAI – Currency markets are reading subtle signals from Chinese authorities as an indication they are slowly nudging the yuan lower to regain export competitiveness, but analysts say protracted yuan weakening is neither the intent nor desirable.

The biggest signal of tolerance for a weaker yuan has come via the People’s Bank of China’s (PBOC) daily reference rate, or fixing, around which the yuan is allowed to trade.

Having used the fixing to contain the yuan’s fall from November even as currencies of trade rivals such as Japan and South Korea tumbled, the PBOC’s fixings have since mid-April become less rigid and even slightly biased to weaken the currency.

State-owned Chinese banks, which frequently step into markets to buy the yuan, have also been less conspicuous.

Based on nominal exchange rates, a bit of yuan depreciation makes sense. It has declined about 2% against the dollar this year, but an index of its value against its major trading partners is up nearly 3%, given the sharp 9% drop in the Japanese yen and the Korean won’s 5% drop against the dollar in that period.

“The PBOC will likely continue to allow the yuan to soften modestly against the dollar at the pace that the central bank feels comfortable with,” said Tommy Wu, senior China economist at Commerzbank. “This is especially true given that the currencies of China’s trading partners have depreciated against the dollar, which in turn pushed up the yuan currency basket.”

Several global investment banks expect the tightly managed yuan to drop to 7.3 per dollar in the coming months, about 1% weaker than current levels around 7.22.

That’s a modest decline, reflecting what most analysts suspect is the PBOC’s mindfulness of the risks a weak currency while keeping an eye on trade competitiveness.

“We do not expect to see any significant one-off depreciations, instead a willingness for it to move gradually, and for the currency to weaken, but with lower volatility,” said Nathan Swami, head of currency trading at Citi.

The PBOC did not immediately respond to Reuters request for comments.

UNNECESSARY

There’s little evidence to show the relative strength in the yuan, despite the massive outflows from China’s anemic markets and economy, is hurting its vast export sector.

New export orders are rising, manufacturing surveys show.

Exports of photovoltaic products, electric vehicles, and lithium batteries, dubbed as China’s “three new things” that have replaced traditional labor-intensive household appliances, furniture, and clothing exports, have contributed notably.

Their exports totaled 1.06 trillion yuan (USD 146.7 billion) in 2023, up a third from a year earlier.

A Shanghai-based photovoltaic exporter, who wanted to go only by her family name Zhu, says her business has not been squeezed by Korean and Japanese products becoming cheaper.

“For some products, Chinese brands have dominated the market. It is hard for Japanese and Korean brands to squeeze in … Currency fluctuation is certainly an important factor, but I don’t see a huge impact yet,” Zhu said.

Chinese manufacturers are also seeing their costs fall thanks to deflationary forces from weak consumption and investment at home.

Adjusted for inflation, the yuan is at its weakest since the 2008 global financial crisis, according to Goldman Sachs’ estimates.

China’s consumer inflation has hovered at nearly zero over the past year.

“That alone confers a degree of competitiveness,” said Frederic Neumann, chief Asia economist at HSBC. “So even if the currency went to 7 (to the dollar), they would still be probably more competitive on a two- or three-year basis.”

On the flipside, the terms of trade have turned against China as prices of oil and other commodities it imports stay high.

Neumann says a bit of currency depreciation could be part of Beijing’s policy toolkit to raise prices of manufacturing inputs and give exporters a bit of extra incentive.

But too many risks hurting consumers already scarred by the collapse in property and stock markets. Per capita spending during the Labour Day holiday is down 11.5% from pre-COVID levels in 2019, according to Reuters calculations based on official data.

China’s dominance as an exporter is another worry.

“The problem in China’s case is that, if they depreciate the currency now, they risk leading to global backlash. They’re already facing a lot of other countries complaining about China’s increasing competitiveness,” said HSBC’s Neumann.

“If you depreciate the currency a little bit, maybe you can help export margins a bit, but you’re not going to raise your export volumes that much. So there’s a limited there’s less of a benefit from a depreciation here than for a small country.”

(USD 1 = 7.2258 Chinese yuan)

(Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan and Lincoln Feast.)

Oil rises on US crude storage draw, Fed rate cut hopes

Oil prices rose in early trade on Thursday as shrinking US crude inventories signaled tighter supply, and amid rising hopes that the Federal Reserve would cut interest rates by the end of the year.

Brent crude futures for July rose 23 cents to USD 83.81 a barrel by 0033 GMT. US West Texas Intermediate crude for June was up 29 cents to USD 79.28 per barrel.

Crude inventories dropped last week by 1.4 million barrels to 459.5 million barrels, according to the Energy Information Administration, more than analysts’ expectations in a Reuters poll for a 1.1 million-barrel draw as refinery activity increased.

Rising gasoline stocks, which swelled unexpectedly by more than 900,000 barrels in the week to 228 million barrels, the EIA said, kept prices from moving higher.

Increasing expectations that the US central bank will cut interest rates by year end after weaker-than-expected US jobs data also boosted oil prices. Lower interest rates can increase spending on crude oil.

Hopes for a ceasefire in the Middle East, however, with the US saying earlier in the week that negotiations on a Gaza ceasefire should be able to close the gaps between Israel and Hamas negotiations, kept oil prices from moving higher.

(Reporting by Laila Kearney in New York; Editing by Stephen Coates)

Gold prices flat with focus on US economic data

Gold prices were flat on Thursday, as investors turned their focus to US economic data that could offer additional insights into the timing of the Federal Reserve’s potential interest rate cuts.

FUNDAMENTALS

* Spot gold was little changed at USD 2,307.96 per ounce, as of 0027 GMT. US gold futures lost 0.3% to USD 2,315.00.

* The US weekly jobless claims data is due at 1230 GMT and the University of Michigan’s consumer sentiment reading on Friday. The consumer price index data is scheduled to be released next week.

* According to the CME’s FedWatch Tool, traders are currently pricing in about a 66% chance that the Fed will cut rates in September.

* Lower interest rates reduce the opportunity cost of holding bullion.

* Fed Bank of Boston President Susan Collins said on Wednesday that the US economy needs to cool off as an avenue toward getting inflation back to the central bank’s 2% target.

* Meanwhile, the Bank of England is likely to move closer to its first interest rate cut in four years as inflation falls, but will probably be cautious about signaling that a move is imminent.

* On the geopolitical front, Hamas said on Wednesday it was unwilling to make more concessions to Israel in negotiations over a ceasefire for Gaza, although talks were still underway in Cairo aimed at pausing Israel’s seven-month-old offensive.

* Spot silver fell 0.2% to USD 27.29 per ounce.

* Platinum was up 0.4% to USD 975.75 and palladium gained 0.3% to USD 954.23.

* The platinum market faces its largest supply shortfall in 10 years in 2024 as shipments from Russia return to normal from last year’s highs and industrial demand stays firm, Johnson Matthey said in a report.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Rashmi Aich)

No limit for reserves in currency intervention, Japan top FX diplomat says

TOKYO – Japan’s top currency diplomat Masato Kanda said on Thursday that comments about the country’s limitations in currency reserves for foreign exchange market intervention are “completely wrong,” reiterating a warning that Tokyo is ready to take actions.

Kanda, Japan’s vice minister of finance for international affairs, also said the government would not make comments about whether it intervened in the foreign exchange market, when asked about a TV Tokyo report that it did citing a government official.

Tokyo is suspected to have intervened on at least two days last week to support the yen after it tumbled to lows last seen more than a decade ago.

(Reporting by Satoshi Sugiyama; Editing by Himani Sarkar and Stephen Coates)

US yields firm as new supply soaked up and CPI in focus

US Treasury yields firmed on Wednesday as investors weighed the chances that the Federal Reserve will lower rates one or more times this year while digesting a plenitude of new Treasury debt and awaiting important inflation data next week.

New supply has been the theme in a week lacking in market-moving economic reports. On Wednesday, the Treasury sold USD 42 billion in 10-year notes at a high yield of 4.483%, a smidge under where the when-issued appeared to be trading on the screens around the close of bidding. The bid-to-cover ratio, an indicator of demand, was 2.49.

That followed a three-year note auction on Tuesday that saw healthy demand.

Gennadiy Goldberg, head of US rates strategy at TD Securities in New York said that despite a small tail — the difference between the average price and the lowest bid that got a 10-year note at the auction — it and the bid-to-cover were in line with recent averages.

The 10-year yield ticked slightly higher after the auction, which can be a sign of disappointment, and was last up 3.1 basis points on the day at 4.492%.

“I would say despite the tail at the auction, it was still relatively strong,” Goldberg said.

The 2-year note yield, which typically moves in step with interest rate expectations, was up 1.3 basis points at 4.8407%.

The US Treasury yield curve spread between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was negative 38.3 basis points, more inverted than -34.8 basis points late Tuesday.

The 30-year bond yield was up 2.7 basis points at 4.6318%. The Treasury will sell USD 25 billion of 30-year bonds on Thursday.

Yields fell sharply on Friday on news that the economy created fewer than expected jobs in April. The report accelerated a bond rally after the Federal Open Market Committee said the recent uptick in inflation and economic growth was unlikely to derail rate cuts this year. The Federal Reserve all but ruled out rate hikes.

The 10-year yield hit its lowest since April 10 on Tuesday, while on Friday the yield on the 2-year note fell to the lowest since April 5.

The April Producer Price Index report comes on Tuesday, and the closely followed CPI number next Wednesday, which will provide insight into whether inflation has resumed its downward trend toward the Fed’s 2% target rate.

This week brought a full roster of Fed speakers to fine-tune the message from last week’s FOMC meeting, which left the Fed funds rate in the 5.25%-5.50% range it’s been in since July.

On Wednesday Boston Fed President Susan Collins said there were risks to cutting rates too soon but she was optimistic the Fed’s current policy will help slow the economy and can get inflation to target in a reasonable time frame.

In the Fed funds futures market, traders are pricing in a 66% chance the Fed will pivot in September with at least a 25-basis-point cut at that meeting, unchanged from Tuesday. The second cut is being bet on for December.

The number of cuts expected in 2024 by the market has come down from six or seven earlier this year, as inflation picked back up and economic growth stayed healthy.

(Reporting by Alden Bentley; Editing by Richard Chang and Nick Zieminski)

Dollar gains on rate outlook, yen weakens for third day

NEW YORK/LONDON – The dollar gained on Wednesday as investors bet on the US economy outperforming peers and was higher for the third day against the Japanese yen, keeping investors wary of the risk of intervention from Tokyo.

In Europe, the Swedish crown came under pressure after the central bank cut interest rates and said it expected two more cuts this year, while the pound was stuck in negative territory ahead of a Bank of England meeting on Thursday.

The move in Sweden was a reminder that the dollar is likely to remain strong as long as other central banks cut rates before the US Federal Reserve.

The yen remained front of mind for currency traders as Japanese officials issued a stronger warning over the impact of the weak currency on the economy.

“Carry trades are still attractive and the market is still more inclined to buy the dip in dollar/yen,” said Vassili Serebriakov, an FX strategist at UBS in New York.

“I don’t think the market is ignoring the risk of intervention, but … unless there’s a significant change in the US economic outlook we don’t think there will be a significant change in the setup for the FX markets either,” Serebriakov added.

Analysts have said any intervention from Tokyo would only offer temporary respite for the yen, given the wide gap between interest rates in the US and Japan.

Traders believe Japanese authorities spent some USD 60 billion last week on propping up the yen after it hit its weakest in 34 years against the dollar around 160 yen.

The dollar was last up 0.59% against the yen at 155.6, up from last week’s low of 151.86.

FED ABOVE ALL

Investors are focused on the pace and timing of Fed rate cuts. The latest data showing weaker-than-expected US jobs creation, together with an easing bias from the US central bank, have cemented expectations that rates will likely be lower by year-end.

The dollar was last up 0.11% at 105.54 against a basket of currencies, above last week’s one-month low. The euro dipped 0.08% to USD 1.0745. Sterling weakened 0.1% to USD 1.2492.

In the meantime, central banks in Europe have already started cutting interest rates. The Swiss National Bank cut in March ahead of Wednesday’s move by Sweden’s Riksbank.

The European Central Bank has signaled its intention to cut in June, assuming the data points in the right direction, and the BoE is gradually smoothing the way to its first cut.

“What we’re looking at is a raft of European central banks going over the next few months, whether or not it’s June, or August. We’ve got a near 50% chance of the Fed cutting in September, but I think that’s probably the one that could get pushed out,” XTB research director Kathleen Brooks said.

“For now, and particularly today, the focus is on Europe cutting first and we’re seeing that upward pressure on the dollar,” she said.

While traders are pricing in an expected Fed rate cut in September, that move will also depend on whether inflation continues to ease back closer to the US central bank’s 2% target.

“It’s going to be hard to go more dovish from here in terms of Fed expectations I think in the near term and that’s why that bias to buy the dollar is still going to be in place,” said UBS’ Serebriakov.

Boston Fed President Susan Collins said on Monday that the current setting of monetary policy would slow the economy in the way she believed would be necessary to get inflation back to the target.

In cryptocurrencies, bitcoin fell 0.77% to USD 62,480, set for a fourth daily loss, its longest stretch of daily declines so far this year.

(Reporting by Karen Brettell; Additional reporting by Amanda Cooper; Editing by Chizu Nomiyama, Toby Chopra, and Alison Williams)

Markets subdued, China trade to rebound

Asian markets are set for a sluggish open on Thursday, with mixed US corporate earnings, a firm dollar, and an upward drift in US bond yields dampening investors’ appetite for risky assets.

The Japanese yen is back in the spotlight, its latest bout of weakness prompting warnings from Tokyo on Wednesday that, so far at least, seem to have gone unheeded. The dollar is on the front foot and gunning for 156.00 yen.

There are a few potential market-moving economic indicators and events on Thursday for investors to get their teeth into, including Chinese trade data, a monetary policy decision from Malaysia, and first-quarter GDP figures from the Philippines.

Asian markets won’t get much steer from Wall Street, which ended mixed on Wednesday. One source of relief may be oil – Brent crude printed a two-month low below USD 82 a barrel, and although inflation worries are running high, oil is down around 10% in recent weeks.

Japan’s financial heavy hitters were out on Wednesday warning that the yen’s weakness could trigger action from policymakers.

Bank of Japan Governor Kazuo Ueda said the central bank could raise rates again, and Finance Minister Shunichi Suzuki voiced “strong concern” over the negative impact of a weak yen and repeated Tokyo’s readiness to intervene in the FX market.

The warnings have had no effect and the dollar was changing hands at 155.50 yen late on Wednesday, up on the day and back to where it was at the BOJ’s April 26 policy announcement. It is now only two yen away from where it was when Japan carried out its second suspected round of intervention on May 1.

On the data front, figures from Beijing are expected to show Chinese imports and exports swung to year-on-year growth in April. But export growth is expected to be modest as factory owners wrestle with weak overseas demand and overcapacity.

Trade relations between China and the West remain fraught, with the latest twist coming from US tech giant Intel saying its sales would take a hit after the US revoked some of the chipmaker’s export licenses for a customer in China.

Bank Negara Malaysia will leave its key interest rate at 3.00% for as sixth consecutive meeting and keep it there at least until 2026, despite a weakening currency and a steady inflation outlook, according to a Reuters poll of economists.

Figures from Manila, meanwhile, are expected to show that the Philippines’ economy expanded at an annual rate of 5.9% in the first quarter, but quarter-on-quarter growth is expected to halve to 1.0% from 2.1% in the October-December period.

The Japanese earnings season rolls on, with major companies including Nissan, Nippon Steel, Panasonic, and Softbank reporting full-year 2024 results on Thursday.

Here are key developments that could provide more direction to markets on Thursday:

– China trade (April)

– Malaysia interest rate decision

– Philippines GDP (Q1)

(Reporting and Writing by Jamie McGeever; Editing by Josie Kao)

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