10-year yields at highest since November following strong retail sales data

NEW YORK, April 15 – Yields on benchmark US 10-year Treasuries hit five-month highs on Monday after stronger-than-expected retail sales data from March suggested the Federal Reserve could delay cutting interest rates this year.

The hotter-than-expected reading – in which retail sales rose 0.7% last month, more than double the 0.3% expected by economists polled by Reuters – followed data last week that suggested inflation remains stickier than markets had expected.

Futures markets are now pricing in 44 basis points in rate cuts by the end of December, down from more than 160 basis points in expected cuts at the start of the year. Markets now expect the first rate cut to come in September, according to CME’s FedWatch Tool.

“The market narrative has shifted to this idea of ‘How can the Fed really cut when the economy is moving along this strong?’,” said Charlier Ripley, senior investment strategist for Allianz Investment Management.

Yields had risen earlier in the session on concerns that supply chains would slow and energy prices would jump following Iran’s drone and missile attack on Israel on Saturday.

“The escalation of the conflict in the Middle East has contributed further to the inflationary angst that is defining the US rates market at the moment,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. “The stickiness of realized inflation demonstrated via the Q1 data has only served to reinforce concerns that there is another leg higher in the offing.”

The yield on 10-year Treasury notes was up 12.9 basis points at 4.628%. The yield on the 30-year Treasury bond was up 13.5 basis points at 4.739%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 5.3 basis points at 4.935%, but remains slightly below its highs from last week.

Comments by New York Federal Reserve President John Williams, who said in a Bloomberg TV interview Monday morning that inflation is not at a turning point and that he still sees rate cuts this year, helped limit the sell-off.

A weaker-than-expected reading in the New York Fed’s Empire State Manufacturing Index and an unchanged reading of homebuilder confidence after four months of gains also offered support for Treasuries.

(Reporting by David Randall; Editing by Chizu Nomiyama and Jonathan Oatis)

Dollar jumps, yen weakest since 1990 after strong US retail sales

NEW YORK, April 15 – The dollar reached its highest since early November against a basket of currencies on Monday and sent the yen to its lowest level since 1990, after US retail sales increased more than expected in March.

Retail sales rose 0.7% last month and data for February was revised higher to show sales rebounding 0.9% instead 0.6% as previously reported. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, rising 0.3% in March.

The greenback has gained as still sticky inflation and strong growth lead investors to push back expectations on when the Federal Reserve is likely to begin cutting rates. The US central bank is also now expected to make fewer cuts than previously.

“US data just keeps coming better and better than expected,” said Brad Bechtel, global head of FX at Jefferies in New York.

Traders are now pricing in fewer than two 25 basis points cuts by year-end, after previously expecting three.

New York Fed President John Williams said on Monday that Fed policy was in a good place and remained restrictive, adding that his own view was that interest rate cuts would likely begin this year.

The Japanese yen in particular has suffered from US dollar strength and the large interest rate differential between the two countries.

Japanese monetary officials have ramped up warnings that they may intervene to shore up the currency. Finance Minister Shunichi Suzuki said on Monday he was watching currency moves closely, repeating that Tokyo is “fully prepared” to act.

Bechtel sees any potential intervention as more likely if the yen is underperforming, rather than during episodes of broad-based dollar strength.

“I think we still need a big day of yen really underperforming the market by 1% or more,” he said, adding that Japanese officials might also step in at a key level such as 155.

The dollar was last up 0.59% against the Japanese currency at 154.19, after getting as high as 154.45.

The dollar index reached 106.23, the highest since Nov. 2, and was last up 0.24% at 106.20.

Investors are also focused on escalating tensions in the Middle East, which are seen as increasing demand for the safe haven US dollar.

Israel faced growing pressure from allies on Monday to show restraint and avoid an escalation of conflict in the Middle East as it considered how to respond to Iran’s weekend missile and drone attack.

The euro fell as low as USD 1.0622, the weakest since Nov. 3, and was last down 0.18% at USD 1.0623.

The single currency recorded its biggest weekly percentage drop since late September 2022 last week as the European Central Bank left the door open to a rate cut in June.

The Australian dollar also dropped to USD 0.6441, the lowest since Nov. 14.

In cryptocurrencies, Bitcoin fell 6.24% to USD 62,950.00. It reached USD 61,323 on Saturday, the lowest since March 20.

(Reporting By Karen Brettell; Editing by Alex Richardson and Sharon Singleton)

Gold firms despite stronger dollar as geopolitical concerns mount

April 15 – Gold prices climbed on Monday due to safe-haven demand spurred by Middle East tensions, even as the dollar and Treasury yields gained following a higher-than-expected uptick in US retail sales in March, feeding apprehensions that the Federal Reserve could delay cutting interest rates this year.

Spot gold rose 0.9% to USD 2,365.09 per ounce as of 2:00 p.m. ET (1800 GMT), after hitting a record high of USD 2,431.29 on Friday in anticipation of Iran’s retaliatory attack against Israel.

US gold futures settled 0.4% higher at USD 2,383.

This very much seems like a geopolitically driven price move, which might be related to statements from the Israeli defense forces that something is going to materialize here, said Bart Melek, head of commodity strategies at TD Securities.

Iran launched explosive drones and missiles late on Saturday in the first attack on Israel by another country in over three decades, stoking fears of a broader regional conflict.

The dollar rose 0.2% and 10-year Treasury yields hit a five-month high after data showed US retail sales increased more than expected in March, further evidence that the economy had ended the first quarter on solid ground.

The market now sees fewer than two 25-basis-point cuts by the year-end, after previously expecting three.

However, “in the near-term, gold prices could fall towards USD 2,200 as the geopolitical premiums get washed out,” said Daniel Pavilonis, senior market strategist at RJO Futures.
Central bank buying has also lent support to bullion.

“It is unlikely that there will be a wholesale reversal to net selling in the near term despite the record gold price, as central bank buying tends to be strategic and insensitive to the price,” analysts at Heraeus said in a note.

Meanwhile, spot silver rose 3% to USD 28.72 after hitting a nearly three-year high in the previous session.

“Both industrial demand – mainly from solar PV manufacturing – and institutional investing appear to be supporting” silver, Heraeus analysts said.

Platinum fell 0.6% to USD 968.00 and palladium lost 2% to USD 1,028.34.

(Reporting by Ashitha Shivaprasad and Anjana Anil in Bengaluru; Editing by Pooja Desai and Ravi Prakash Kumar)

European stocks kick off week on cautious note amid geopolitical tensions

April 15 – European shares inched up on Monday, with defense stocks among top gainers, as investors assessed the wider implications of escalating tensions in the Middle East, while optimism around imminent interest rate cuts also aided sentiment.

The pan-European STOXX 600 gained 0.1%, led by the defense sector that was up 0.6% by 0713 GMT, after Iran launched explosive drones and missiles at Israel over the weekend in retaliation for a suspected Israeli attack on its consulate in Syria on April 1.

Among top movers, Temenos jumped 15.6% after the Swiss software firm said a “special committee” formed by its board found that accusations in a report by Hindenburg Research were incorrect and misleading.

Ageas climbed 3.6% as France’s BNP Paribas said it had reached an agreement with China’s Fosun Group to acquire its 9% stake in the Belgian insurer for around 730 million euros (USD 777.60 million).

Adidas rose 3.5% after brokerage Morgan Stanley double-upgraded the German sportswear maker to “overweight” from “underweight”.

(Reporting by Ozan Ergenay and Johann M Cherian; Editing by Sohini Goswami)

Traders have more reason to buy a dollar they value

April 15 – Risk aversion stemming from fear about an escalation of the conflict in the Middle East gives traders more reason to buy a dollar they already value.

The dollar has been in high demand this year as traders adjust bets to reflect the likelihood that the U.S. interest rate stays high. They have purchased more than USD 30 billion since January. Speculators have flipped from a USD 12 billion wager against the greenback to a USD 17 billion bet that it rises as expectations for the first U.S. interest rate cut of a 2024 easing cycle are pushed from March to September.

The uncertainty stemming from fears about a growing conflict in the Middle East, the continuing war in Ukraine and China’s economic woes gives traders plentiful cause to buy more dollars.

Not only is the dollar considered safe – and can soar in value even when the United Sates is at the center of any concerns – it is also the highest-yielding major currency. Those holding dollars are being paid to do so while they wait to see how situations develop.

Currently there are three big bets against the dollar that are more likely to be unwound, boosting it further. Gold could also benefit.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

De-risking, seeking safety as Middle East tensions rise

April 15 – Asian markets are set to open on the defensive on Monday, with heightened tensions in the Middle East spurring strong demand for safe-haven assets like the dollar, gold, and US Treasuries at the expense of stocks and local currencies.

Investor sentiment was already veering towards the negative following the US bank earnings-driven equity market slump on Friday – JP Morgan shares had their biggest fall in almost four years and world stocks lost the most in six months.

US stock futures are pointing to another steep decline at the open on Monday, so it’s likely Asian bourses will follow suit. Oil prices, which hit a six-month high on Friday, are likely to make further gains on Monday.

In such a febrile environment local Asian economic indicators and events are likely to take a back seat. Monday’s calendar is pretty light, with only Indian trade and wholesale price inflation data, and Japanese machinery orders on tap.

China’s first-quarter GDP on Tuesday and Japanese consumer price inflation figures on Friday are the two economic indicators from Asia that could most move local markets this week.

But for Monday at least, investors will be focused on reducing risk and playing it safe, and in that regard, there could be some big movement in the Japanese yen.

The yen is traditionally seen as a ‘safe-haven’ asset that does well in times of heightened risk aversion, boosted by large repatriation flows from Japanese investors and short covering from currency traders using the yen to fund carry trades.

And there is a large short position to cover – the yen is at a 34-year low below 153.00 per dollar and the latest US futures market data show hedge funds’ net short yen position is the biggest in 17 years.

To the surprise of many, Japanese authorities have not yet intervened to stop the rot, despite the near-daily warnings from officials that “excessive volatility is undesirable” and that Tokyo stands ready to respond to sharp currency swings.

Perhaps Tokyo has not yet intervened because the yen’s slide is fully justified on “fundamental” grounds – US yields and implied rates are rising faster than their Japanese equivalents because US growth and inflation rates are higher than Japan’s.

The strong dollar and recent spike in US bond yields, however, pose potentially significant problems for Asia. They represent a tightening of financial conditions and make servicing dollar-denominated debt more expensive.

A sharp fall in Treasury yields as investors scramble to reduce risk in their portfolios due to intensifying geopolitical tensions is unlikely to offer much comfort.

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

– India trade (March)

– India wholesale price inflation (March)

– Japan machinery orders (February)

(By Jamie McGeever; Editing by Diane Craft)

Treasury prices rise as Mideast tensions spur bond buying

NEW YORK, April 12 – Treasury prices rose on Friday, pushing yields lower as Middle East tensions spurred safe-haven buying and as hot inflation readings earlier this week forced investors to sharply readjust their outlook for Federal Reserve interest rate cuts.

Boston Fed President Susan Collins said she’s eyeing two rate cuts this year, adding her voice to other Fed officials who have recently pushed back on market views for a quick series of cuts and an easing of monetary policy.

Collins’ remarks followed a speech in which she said the US central bank is likely to cut its policy rate at some point this year but that uncertainties and risks around inflation mean the Fed needs to take its time before doing so.

Treasury buying also was spurred by dour results from several large US banks, including JPMorgan JPM.N, the biggest US bank by assets, and Israeli fears of an imminent attack by Iran or its proxies also played a part, analysts said.

“A lot of investors don’t want to be holding risky assets heading into the weekend, and there’s a little bit of disappointment on some of the bank earnings as well,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

But the biggest catalyst was the hotter-than-expected report on the consumer price index on Wednesday.

“This report has challenged a lot of the assumptions that the market has had about the Fed cycle and what that means for broader asset markets,” said Brian Daingerfield, a macro strategist at NatWest Markets in Stamford, Connecticut.

“What the CPI print has forced the market to reckon with is this possibility that the Fed might be in a position to not cut at all this year,” he said. “You have this reset higher in rates, this reset higher in expectations and this change in the discussion around the Fed.”

The two-year Treasury’s yield surged past 5% on Thursday as futures traders slashed bets on the number of Fed rate cuts to two and pushed back the start of the easing cycle to September from expectations of June.

Market bets on the Fed cutting its target rate in June fell to 27.1%, down from 53.2% last week, according to the CME Group’s FedWatch Tool.

The yield on two-year Treasury notes, which typically moves in step with interest rate expectations, slid 8.1 basis points to 4.8822%, while the yield on the benchmark 10-year Treasury note’s yield fell 5.8 basis points to 4.499%.

“Some investors are buying the dip, so to speak, and making sure that they get in at these highly attractive levels,” Goldberg said. “There’s a lot of uncertainty as to what happens next. A lot of investors are debating whether rate cuts are still possible this year.”

The difference in two- and 10-year Treasury yields, seen as a recession harbinger when a shorter-duration yield is higher, or inverted, than longer securities, was at -38.24 basis points.

The yield on the 30-year bond fell 6 basis points to 4.603%.

(Reporting by Herbert Lash; Editing by Andrea Ricci)

Gold surges as Middle East tensions spur safe-haven rush

April 12 – Gold prices rose above USD 2,400 per ounce to an all-time high on Friday, heading for their fourth week of gains, as growing tensions in the Middle East prompted investors to seek refuge in the safe-haven assets.

Spot gold eased 0.8% to USD a2,353.35 per ounce as of 1:40 p.m. ET (1740 GMT), taking a breather after hitting a record high of USD 2,419.79. Prices were up around 1% for the week.

US gold futures settled 0.1% higher at USD 2,374.1.

Taking cues from gold’s upward momentum, platinum tested the key USD 1,000 per ounce level to its highest level in nearly four months.

“What’s really telling about the strength of gold is the US dollar index and Treasury yields are climbing, yet gold continues to rally strongly – that’s very indicative of strong safe-haven demand,” said Jim Wyckoff, senior analyst at Kitco Metals.

A reportedly imminent attack by Iran on Israel is a real and viable threat, the White House said, giving no details about possible timing, reiterating that the US takes its commitments to defend Israel seriously.

“Gold continues to go from strength to strength as we are witnessing fear of missing out on clear display,” Ole Hansen, head of commodity strategy at Saxo Bank, said in a note.

Gold’s recent surge arrived despite traders dialing back bets for an early interest rate cut from the Federal Reserve.

“Gold has pushed back against some data that should have typically been negative. It will be somewhat healthy to see a correction in the bull’s market, but the trend will continue to be positive,” said Chris Gaffney, president of world markets at EverBank.

Meanwhile, Goldman Sachs hiked its year-end gold price forecast to USD 2,700 per ounce from USD 2,300, citing the metal’s bull market’s indifference to the usual macro factors.

Spot silver fell 1% to USD 28.21 per ounce, after touching its highest level since early 2021. Platinum rose 0.6% to USD 985.65 and palladium firmed 0.9% to USD 1,055.62.

All three metals were poised for weekly gains.

(Reporting by Ashitha Shivaprasad, Brijesh Patel, and Anjana Anil in Bengaluru; Editing by Vijay Kishore and Alan Barona)

In the Market: The mysterious one-day drop in a repo rate

April 12 – Something odd just happened in US short-term funding markets: a benchmark interest rate suddenly fell precipitously on March 19 before bouncing back up the next day.

The drop, which has garnered little attention outside Wall Street trading desks, happened in a corner of the repurchase agreement market, or repo, where firms borrow funds from investors against Treasuries.

That day a key repo interest rate, called the Treasury GCF Repo Index, fell to 5.142%, a significant drop from its previous day’s print of 5.334%. The volume of transactions went up USD 57.64 billion from USD 31 billion the previous day.

Behind the drop was a large, single trade late in the day involving a big player, according to three market sources and a review of publicly available transaction data. The trade was in the mid-USD 20 billion range at a 5% rate and happened sometime after 1 pm, according to two of the sources.

The trade was odd as the bulk of repo market activity happens in the morning. A big investor was likely stuck with a huge amount of cash and needed to get it off its books, the sources said. They attributed it to bad collateral management.

Reuters could not determine further details of what happened, including the identity of the parties involved in the trade.

The aberrant trade poses a mystery that’s worth solving for the sake of transparency in one of the world’s most important markets. While the incident may be contained, with the market working as intended, information about what went on could provide important insights into market function.

Short-term funding markets are crucial to Treasuries and global finance, and disruptions there can have broad ramifications, including for financial stability. They, however, tend to be secretive, with even regulators sometimes struggling to understand what goes on there.

Darrell Duffie, a Stanford University finance professor, said regulators are probably curious about what happened. “A transaction this large, and at these terms should raise some antennae,” he said.

Duffie, however, noted that there was no obvious sign that it represented “an undue risk to the financial system or bad behavior.”

The Depository Trust & Clearing Corp and the New York Fed, which publish general collateral repo rates, declined to comment. The Securities and Exchange Commission declined to comment.

The trade happened around the time the New York Fed conducts its reverse repo operations, where money market funds, government-sponsored enterprises, and banks can put up cash with the Fed, the sources said. The Fed has been paying 5.3% for overnight funds, much higher than the rate the investor got in the large trade on March 19.

If the trade involved a government-sponsored enterprise or money market fund, it could provide information about the institution’s risk controls.

Understanding what went on could also shed light on market structure and concentration risks. The fact the trade didn’t happen at a much lower rate suggested that the investor behind the trade was important enough for banks to help them, two of the sources said.

To be sure, the trade may not have any broader implications. One of the market sources said such incidents happen from time to time. The Treasury GCF repo index, for example, saw a similar one-day drop on July 8, 2022, when it fell to 1.176% from 1.55% the previous day before bouncing back.

The impact of the March 19 trade on the overall market was limited. Other benchmark rates based off transactions in the market, such as the Secured Overnight Financing Rate and the Broad General Collateral Rate, were not affected by the trade.

Even so, it was large enough to show up in transaction data. In calculating the Broad General Collateral Rate, for example, the New York Fed publishes the interest rates at which transactions are done by percentiles.

On March 19, the first percentile showed a rate of 5%, down from 5.25% the previous day. By March 20, it had bounced back up again.

(Reporting by Paritosh Bansal; Editing by Anna Driver)

China’s March exports and imports shrink, miss forecasts by big margins

BEIJING – China’s March exports contracted sharply, while imports also unexpectedly shrank, both undershooting market forecasts by big margins, customs data showed on Friday, highlighting the stiff task facing policymakers as they try to bolster a shaky economic recovery.

Shipments from China slumped 7.5% year-on-year last month, marking the biggest fall since August last year and compared with a 2.3% decline forecast in a Reuters poll of economists. They rose 7.1% in the January-February period.

“Besides disruptions from forex changes, the worse-than-expected momentum of both exports and imports in March indicate that more comprehensive and targeted policy stimulus will be needed for China to meet its ambitious growth target,” said Bruce Pang, chief economist at Jones Lang Lasalle.

“It will be a long march for China’s foreign trade to again provide growth energy for the state.”

In the first quarter, exports showed a 1.5% year-on-year rise, according to the data.

The nation’s exporters endured a tough period for much of last year due to soft overseas demand and tight global monetary policy. With the Federal Reserve and other developed nations showing no urgency to cut interest rates, Chinese manufacturers may be faced with a further period of challenges as they try to shore up goods sales overseas.

The China Beige Book survey said the recent improvements in business conditions, including better corporate revenue, profits and capital spending, were “more of a return to mediocre from genuinely poor.”

Analysts warn Western concerns over China’s overcapacity in some industries may bring more trade barriers for the world’s manufacturing hub.

While overall exports weakened last month, steel shipments were at the highest level since July 2016.

Imports for March also declined 1.9% year-on-year from the 3.5% growth in the first two months, missing an expected 1.4% rise. For the first quarter, imports rose 1.5% year-on-year.

The imports figure underlined the sluggish domestic demand conditions, which were also highlighted by Thursday’s data showing consumer inflation had cooled more than expected last month.

March soybean imports fell to their lowest in four years while crude oil imports slipped 6%.

China’s economy got off to a relatively solid start this year after policymakers rolled out support measures to revive household consumption, private investment and market confidence since the second half of 2023.

Yet, growth in the Asian giant remains uneven and analysts don’t expect a full-blown revival anytime soon mainly due to a protracted property sector crisis.

Rating agency Fitch cut its outlook on China’s sovereign credit rating to negative on Wednesday, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models.

The economy likely grew 4.6% in the first quarter from a year earlier – the slowest in a year despite signs of stabilisation, another Reuters poll showed on Thursday, maintaining pressure on policymakers to unveil more stimulus measures.

China last month set a full year growth target of around 5%, which analysts have described as ambitious as they noted that last year’s 5.2% expansion came off a COVID-hit 2022.

Some analysts say the central bank faces a challenge as more credit is flowing to production than into consumption, exposing structural flaws in the economy and reducing the effectiveness of its monetary policy tools.

On the fiscal front, China plans to issue 1 trillion yuan ($138.18 billion) in special ultra-long term treasury bonds to support key areas. It also raised the 2024 special bond issuance quota for local governments to 3.9 trillion yuan from 3.8 trillion yuan in 2023.

Moreover, in an attempt to revive demand, the cabinet last month approved a plan aimed at promoting large-scale equipment upgrades and sales of consumer goods. The head of the country’s economic planner estimated the plan could generate market demand of over 5 trillion yuan annually.

(Reporting by Ellen Zhang and Joe Cash; Editing by Shri Navaratnam)

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