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June 14 (Reuters) – Asian markets are set for an explosive open on Wednesday after a below-consensus reading of headline US inflation lit the touchpaper for a rally across all risky assets on Tuesday, although investors will be mindful of the steep rise in US bond yields.

The fall in US inflation to a two-year low has convinced investors the Federal Reserve will pause raising rates on Wednesday, and they like what they see – the S&P 500, Nasdaq and MSCI World index all hit their highest levels since April last year, the dollar fell and cash flowed out of safe-haven bonds.

The rush into riskier assets was also supported by China’s de facto policy easing as the central bank cut reserve repo rates for the first time in 10 months. This could be a precursor to lower benchmark interest rates in the coming weeks – yuan traders certainly seem to think so.

Indian wholesale price inflation, unemployment, and import and export prices from South Korea, and New Zealand’s first quarter current account top the Asian and Pacific data calendar on Wednesday.

India’s annual WPI inflation could be especially important. Economists expect a fall of 2.35% in May, pointing to the strongest deflationary pressures in three years. With the year-on-year global oil price still down around 40%, it could be even lower.

But the driving forces for markets will likely be global.

Traders are putting a 95% probability on the Fed standing pat on Wednesday, a consensus so strong the Fed will almost certainly respect. The focus for investors will be on the statement and Fed Chair Jerome Powell’s press conference for signs on whether it will be a ‘hawkish’ or ‘dovish’ pause.

All of that will come after Asian markets close, so in the meantime, local investors will take their cue from yet another remarkable performance on Wall Street, especially tech stocks and the Nasdaq.

The NYSE FANG+ index of mega tech stocks rose 0.9% for a fourth consecutive daily rise, bringing its year-to-date gains to 72%. The index has posted only four declines in the past 21 trading sessions.

Even beleaguered Chinese tech stocks are finally feeling the glow – the Hang Seng tech index is up 11% so far this month, outperforming the broader Hang Seng (up 7%) and significantly outpacing the main Chinese indices, which are up 1% or 2%.

The MSCI Asia ex-Japan index rose more than 1% on Tuesday, its second-best day since March, while Japan’s Nikkei hit a fresh 33-year high above 33,000 points.

Momentum across all these markets is coming from strong technical, positioning and ‘fear of missing out’ tailwinds. One major headwind, particularly for Asian assets, could be the surge in US Treasury yields, although that for now at least is being mitigated by the dollar’s slide to a three-week low.

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

– India WPI inflation (June)

– South Korea unemployment (May)

– New Zealand current account (Q1)

(By Jamie McGeever)

 

NEW YORK, June 13 (Reuters) – US Treasury yields rebounded from a brief decline on Tuesday after economic data showed a slowing rise in inflation, a day ahead of the Federal Reserve’s next interest rate decision.

The consumer price index (CPI) showed an annual increase in prices of 4% in May, slowing from a 4.9% reading in April. On a monthly basis, CPI increased 0.1%, just shy of the 0.2% increase expected by economists polled by Reuters.

Traders firmed up expectations the Fed will keep rates steady at the conclusion of its policy meeting on Wednesday and keep the benchmark rate at 5.0%-5.25%.

Expectations for the Fed to hold rates are now at 95.3%, up from 79.1% a day ago, according to CME’s FedWatch Tool, but expectations for a 25-basis-point hike at the July meeting are at 63.1%.

“Not only should the Fed skip tomorrow’s hike, they should just skip the entire meeting. The data ever so slightly tilts things towards this not just being a skip, but a full-blown hold,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

But the early fall in yields proved to be temporary ahead of the Fed’s policy announcement and another reading on inflation, the producer price index for May.

“People are sort of hedging their bets. They are not really sure what is likely to happen,” said Sam Stovall chief investment strategist at CFRA in New York.

“Maybe the Fed has been backed into skipping this month but there is a possibility they won’t be skipping next month, so maybe it is like pulling petals where you skip, you hike, you skip, you hike.”

In addition, Bank of England Governor Andrew Bailey said official data published earlier in the day showed the labor market was “very tight” and food inflation was easing very slowly, indicating the central bank will remain on a hiking path.

The yield on 10-year Treasury notes was up 7.4 basis points at 3.839%.

Policy announcements are also expected from the European Central Bank (ECB) and Bank of Japan later in the week.

An USD 18-billion auction of 30-year bonds by the Treasury was strong, with a high yield of 3.908% and demand for the debt at 2.52 times the bonds on sale, the highest since January 2020, according to Refinitiv data.

The yield on the 30-year Treasury bond was up 3.5 basis points to 3.941 %.

A closely watched part of the US Treasury yield curve measuring the gap between two- and 10-year notes, seen as an indicator of economic expectations, was at a negative 86.3 basis points after inverting by as much as a negative 94.49 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 10.8 basis points at 4.700% after rising to 4.707%, its highest since March 10.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at
2.162%, after closing at 2.145% on Monday.

The 10-year TIPS breakeven rate was last at 2.212%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama, Andrea Ricci and Richard Chang)

 

NEW YORK, June 12 (Reuters) – Many bond investors are keeping a defensive stance in managing their portfolios ahead of this week’s Federal Reserve policy meeting, as they brace for the end of the monetary policy tightening cycle this year and possible interest rate cuts sometime in 2024.

Investors widely expect the US central bank’s policy-setting Federal Open Market Committee will keep its benchmark overnight interest rate steady in the 5.00%-5.25% range at the end of a two-day meeting on Wednesday. The federal funds futures market, however, has factored in a roughly 70% chance of a rate hike at the meeting in July, and about 100 basis points of easing over the next 12 months.

Fed Governors Christopher Waller and Philip Jefferson last month laid out the options for the June 13-14 meeting. Waller said he is concerned about the lack of progress on inflation, and while skipping a rate hike this week may be possible, an end to the hiking campaign isn’t likely.

Jefferson said that “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.”

For fixed-income investors, that uncertainty of not knowing what the Fed will do has made them wary of making big, risky bets, preferring to stick to high-quality assets such as Treasuries and highly rated investment-grade bonds.

“Going into high-quality fixed income specifically on the front end and going into cash, which provides a competing asset class because of the yield you get, are a good safety valve to have, with all the uncertainties popping up,” said Rob Daly, director of fixed income and managing director at Glenmede Investment Management.

There are indeed plenty of signs in the economy to be worried about, market players said.

The US labor market, for one, is cooling, with a large drop in household employment and an increase in the unemployment rate in May.

In manufacturing, the Institute for Supply Management’s index has been in contraction territory for seven consecutive months. The ISM services index, on the other hand, barely grew in May as new orders slowed.

Scott Anderson, chief economist at Bank of the West, noted at the end of May that models from the Cleveland and New York Fed banks, based largely off the Treasury yield curve, have placed the probability of a US recession at 79% and 71%, respectively, over the next 12 months, a pandemic peak.

“The further the central banks go in raising rates, the greater the risk that when growth and inflation … finally capitulate, the landing could end up being a lot harder than most are now predicting,” Anderson said.

LOOMING MARKET DISLOCATIONS?

Christian Hoffmann, managing director and portfolio manager at Thornburg Investment Management, said market dislocations have been coming on a two-year cycle, noting that 2022 saw the worst year for fixed income in the modern era following the Fed’s most aggressive monetary policy tightening since the 1980s.

“We’re really focusing on higher-quality situations in the various risk buckets, but this isn’t a market where you should avoid risk entirely,” Hoffmann said.

“While we are happy to take risks in opportunistic situations, this is still a time for prudence and you don’t want to go ‘all in’ in any situation.”

Some bond market participants, however, are preparing for rate cuts next year and unconvinced that another increase in borrowing costs is forthcoming, citing indicators pointing to falling core inflation in the coming months.

Ryan Swift, bond strategist at BCA Research, said leading inflation indicators suggested that the next two months of data on prices could be weak enough for the Fed to pass up hiking rates this week as well as next month.

He recommended lengthening duration, a gauge of the bond’s sensitivity to interest rate changes, in portfolios. Going long duration reflects expectations that US yields will fall because the Fed will have to cut rates. As the economy slows, longer-duration fixed-income assets tend to perform well.

“Consider adding some intermediate-term or longer-term bonds to portfolios gradually and stay in higher-credit-quality bonds,” said Kathy Jones, chief fixed income strategist at Schwab.

“While it may be tempting to stay in very short-term investments due to risk-free yields at 5% or higher, that opens investors up to reinvestment risk – the risk that they will have to reinvest maturing securities when yields are lower.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Paul Simao)

 

NEW YORK, June 12 (Reuters) – Longer-dated US Treasury yields inched higher on Monday as investors awaited upcoming inflation data and a policy announcement from the Federal Reserve in the coming days.

The consumer price index (CPI) for May is expected on Tuesday to show a slowing rise in inflation on a year-over-year basis to 4.1% from the April reading of 4.9%, according to economists polled by Reuters, with a monthly increase of 0.2%, down from a 0.4% rise the prior month.

The CPI data along with the producer price index (PPI), due on Wednesday, could influence expectations for the Fed’s policy announcement Wednesday afternoon.

The Fed is currently expected to deliver a “hawkish pause” at its policy announcement, taking a break from its string of rate hikes while cautioning that more hikes could be necessary should inflation remain stubbornly high. The central bank is also due to release its summary of economic projections (SEP) for the first time since its March meeting.

“Right now, the market is probably going to move sideways until you get the inflationary data tomorrow and then all eyes will be on the Fed, because you also get the summary of economic projections too,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“The Fed has been a little more aggressive than what the market is pricing in, and now the market has kind of gone back to where the Fed is, so that summary of economic projections becomes more compelling to see what the forecast is for the end of this year and for the end of next year.”

The yield on the benchmark 10-year Treasury notes was up 0.6 basis points at 3.751%.

An auction of USD 32 billion in 10-year notes was soft, according to analysts, with a high yield of 3.791% and demand for the debt at 2.36 times the notes on sale.

Traders are pricing in a 76.9% chance the Fed will hold rates steady at its next policy announcement, up from 70.1% on Friday, according to CME’s FedWatch Tool.

Barnes also said last week’s rate hike from the Bank of Canada after a four-month pause raises the question of whether the Fed will still be raising rates in the back half of this year and the start of next year.

The yield on the 30-year Treasury bond was up 0.8 basis points at 3.895%.

Treasury will issue a flurry of supply this week, including USD 18 billion in 30-year notes on Tuesday along with a slew of shorter-term bills throughout the week.

The yield on the 3-year Treasury note was down 1.7 basis points at 4.230%. A USD 40-billion auction of the notes was in-line with the market with a high yield of 4.202% which was just slightly over the bidding deadline yield, while demand was an above average 2.7 times the notes on sale.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 83.6 basis points after inverting to as much as a negative 87.55 earlier, its deepest inversion in three months.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 1.9 basis points at 4.586%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.14%, after closing at 2.169% on Friday,

The 10-year TIPS breakeven rate was last at 2.193%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Susan Fenton and Nick Zieminski)

NEW YORK, June 12 (Reuters) – Many bond investors are keeping a defensive stance in managing their portfolios ahead of this week’s Federal Reserve policy meeting, as they brace for the end of the monetary policy tightening cycle this year and possible interest rate cuts sometime in 2024.

Investors widely expect the US central bank’s policy-setting Federal Open Market Committee will keep its benchmark overnight interest rate steady in the 5.00%-5.25% range at the end of a two-day meeting on Wednesday. The federal funds futures market, however, has factored in a roughly 70% chance of a rate hike at the meeting in July, and about 100 basis points of easing over the next 12 months.

Fed Governors Christopher Waller and Philip Jefferson last month laid out the options for the June 13-14 meeting. Waller said he is concerned about the lack of progress on inflation, and while skipping a rate hike this week may be possible, an end to the hiking campaign isn’t likely.

Jefferson said that “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.”

For fixed-income investors, that uncertainty of not knowing what the Fed will do has made them wary of making big, risky bets, preferring to stick to high-quality assets such as Treasuries and highly rated investment-grade bonds.

“Going into high-quality fixed income specifically on the front end and going into cash, which provides a competing asset class because of the yield you get, are a good safety valve to have, with all the uncertainties popping up,” said Rob Daly, director of fixed income and managing director at Glenmede Investment Management.

There are indeed plenty of signs in the economy to be worried about, market players said.

The US labor market, for one, is cooling, with a large drop in household employment and an increase in the unemployment rate in May.

In manufacturing, the Institute for Supply Management’s index has been in contraction territory for seven consecutive months. The ISM services index, on the other hand, barely grew in May as new orders slowed.

Scott Anderson, chief economist at Bank of the West, noted at the end of May that models from the Cleveland and New York Fed banks, based largely off the Treasury yield curve, have placed the probability of a US recession at 79% and 71%, respectively, over the next 12 months, a pandemic peak.

“The further the central banks go in raising rates, the greater the risk that when growth and inflation … finally capitulate, the landing could end up being a lot harder than most are now predicting,” Anderson said.

LOOMING MARKET DISLOCATIONS?

Christian Hoffmann, managing director and portfolio manager at Thornburg Investment Management, said market dislocations have been coming on a two-year cycle, noting that 2022 saw the worst year for fixed income in the modern era following the Fed’s most aggressive monetary policy tightening since the 1980s.

“We’re really focusing on higher-quality situations in the various risk buckets, but this isn’t a market where you should avoid risk entirely,” Hoffmann said.

“While we are happy to take risks in opportunistic situations, this is still a time for prudence, and you don’t want to go ‘all in’ in any situation.”

Some bond market participants, however, are preparing for rate cuts next year and unconvinced that another increase in borrowing costs is forthcoming, citing indicators pointing to falling core inflation in the coming months.

Ryan Swift, bond strategist at BCA Research, said leading inflation indicators suggested that the next two months of data on prices could be weak enough for the Fed to pass up hiking rates this week as well as next month.

He recommended lengthening duration, a gauge of the bond’s sensitivity to interest rate changes, in portfolios. Going long duration reflects expectations that US yields will fall because the Fed will have to cut rates. As the economy slows, longer-duration fixed-income assets tend to perform well.

“Consider adding some intermediate-term or longer-term bonds to portfolios gradually and stay in higher-credit-quality bonds,” said Kathy Jones, chief fixed income strategist at Schwab.

“While it may be tempting to stay in very short-term investments due to risk-free yields at 5% or higher, that opens investors up to reinvestment risk – the risk that they will have to reinvest maturing securities when yields are lower.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Paul Simao)