Benchmark US yield hits 8-week low on weak data, recession fears

NEW YORK, July 22 (Reuters) – The US 10-year Treasury note yield was on track to end the week near its lowest since late May after weak data on Friday added to worries about the global economy and traders reassessed the Federal Reserve’s ability to raise rates much further.

Data on Friday showed the global economy teetering into a slowdown at a time when central banks are focusing on battling inflation by limiting access to cash.

Business activity in the United States contracted this month for the first time in nearly two years, S&P Global’s US Composite PMI Output Index showed. Euro zone activity contracted for the first time in more than a year and growth in Britain was at a 17-month low.

Separately, Japan’s government is expected to sharply cut its forecast for domestic growth, while China’s strict COVID-19 lockdowns and Russia’s invasion of Ukraine have further damaged global supply chains.

“There was a pretty sharp correction after the PMIs,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York. “The market is quickly pricing out the possibility of the Fed being able to raise rates aggressively for the remainder of the year.”

A 75 basis-point hike from the Fed is all but priced in according to traders, with the probability of a larger move dwindling down into the single digits.

Yields were lifted off their lows in part by comments from European Central Bank President Christine Lagarde, who committed to fighting inflation despite growing fears of a recession in the euro bloc.

But yields across the US curve ended near their lowest in the session.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 12.1 basis points at 2.974%.

The yield on 10-year Treasury notes was down 15 basis points to 2.758%. The yield on the 30-year Treasury bond was down 9.7 basis points to 2.975%.

The two- and 10-year Treasury notes yield spread, seen as an indicator of economic expectations, was at -22.0 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.585%, after closing at 2.591% on Thursday.

The US dollar 5 years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, was last at 2.367%.

(Reporting by Rodrigo Campos; Editing by Nick Zieminski and Will Dunham)

Strong dollar looms over U.S. earnings season

NEW YORK, July 21 (Reuters) – Companies reporting earnings in coming weeks are likely to mention one common factor gouging their results: the strong dollar.

The US currency stands near a 20-year high against a basket of its peers and is up 15.1% in the past year, lifted by a hawkish Federal Reserve and investors seeking shelter from turbulent markets.

A strong dollar can be a headwind for US companies as it makes exporters’ products less competitive abroad and hurts multinationals that need to convert their foreign profits back into the US currency.

Each percentage point of year-on-year increase in the US Dollar Index, which measures the dollar against six other currencies, translates to a 0.5 percentage point hit to S&P 500 earnings growth, analysts at MorganStanley estimated.

“You seemingly can’t get a break right now. We’re starting to get some relief from oil prices, but you’ve still got the dollar banging on you,” said Bill Stone, chief investment officer at the Glenview Trust Company.

International Business Machines Corp. (IBM), Netflix Inc. (NFLX) and Johnson & Johnson (JNJ) were among the companies that in the past week cited the dollar’s strength as a headwind, with Johnson & Johnson joining Microsoft Corp MSFT.O by cutting its guidance due to the impact of the greenback’s rise.

Next week’s results from Apple Inc. (AAPL), Microsoft Corp. (MSFT), Coca-Cola Co (KO) and a slew of other companies will give investors a better picture of how businesses are holding up in the face of the strong dollar and soaring inflation.

Investors are also awaiting what the Fed will have to say on those topics at its monetary policy meeting next week, at which it is widely expected to deliver another jumbo-sized 75 basis-point rate increase.

DOLLAR DOLDRUMS

Overall, some 40% of S&P 500 revenues come from overseas, data from FactSet showed. Information technology leads all sectors with 58% of revenues derived internationally, followed by materials with 56%, while utilities companies source just 2% of their revenues out of the United States, according to FactSet.

The dollar’s strength threatens to combine with high inflation, supply chain issues and other factors to weigh on earnings, analysts said.

“The rate of change on the dollar exhibits a strong negative correlation over time vs. S&P 500 earnings revisions. USD strength comes at an inopportune time for corporates already facing margin pressure and increasingly weaker demand,” Morgan Stanley’s analysts wrote.

So far, 5.1% of the S&P 500 companies that have reported their second quarter results have posted earnings above expectations, nearly half the average of 9.5% over the prior four quarters, according to Refintiv data.

Few can say when the dollar will turn, as the inflation-fighting Fed is expected to raise interest rates more aggressively than other central banks, boosting the US currency’s appeal to yield-seeking investors.

Still, some are betting that signs of a peak in the dollar’s rally could balance out some of the damage caused by the burgeoning greenback.

Dollar peaks over the past 40 years have been followed by rallies in the S&P 500, with the benchmark index climbing by an average of 10% in the next 12 months on increased risk appetite and expectations of improving earnings, wrote John Lynch, chief investment officer for Comerica Wealth Management.

Jim Paulsen, chief investment strategist at The Leuthold Group, said the dollar is trading at a nearly 120% “safe-haven premium” based on its historical relationship to the consumer sentiment index.

The dollar has declined by an average 4.5% over 12 months each time its premium rose over 20% since 1988, he added.

Others are looking at the bright side of dollar strength, which some see reflects the belief that the United States can weather a looming global slowdown better than other countries.

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, has been increasing his overweight in US equities, betting that any the effects of a strong dollar will be outweighed by better economic growth over the long run.

“We think investors get too focused on the dollar’s impact on earnings,” he said.

(Reporting by David Randall; Additional reporting by Sinead Carew; Editing by Ira Iosebashvili and Jonathan Oatis)

Gold set to snap 5-week losing streak on softer dollar, yields

July 22 (Reuters) – Gold headed for its first weekly gain in six on Friday as a pullback in US Treasury yields and the dollar’s decline bolstered non-yielding bullion’s safe-haven appeal as economic risks persisted.

Spot gold rose 0.2% to USD 1,721.29 per ounce by 2:21 p.m. EDT (1821 GMT). It was up about 1% so far this week, following a strong rebound from a more than one-year low of USD 1,680.25 on Thursday.

US gold futures settled 0.8% higher at USD 1,727.4.

Gold’s uptick was helped by a retreat in US 10-year Treasury yields.

Boosting gold’s allure for overseas buyers, the dollar index, also a rival safe haven, headed for its first weekly fall in four as disappointing US data dampened expectations of a large 100-basis-point interest rate hike by the Federal Reserve at its July 26-27 policy meeting.

The lower dollar, declining growth stocks and the dip in yields are all helping gold, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

While the Fed meeting is likely to be a “high-volatility event” for gold, there may not be many steep hikes after the one next week, Streible added.

Rising US rates increase the opportunity cost of holding non-yielding bullion.

“Assuming the Fed hikes by 75 bps in July, we believe the bulk of the near-term downside risk has been priced in; but the longer-term trend is still to the downside,” Standard Chartered analyst Suki Cooper said in a note.

But gold could also find support from a price-responsive physical market and if recession risks deepen, Cooper added.

In physical markets, demand picked up in some Asian hubs this week amid softer prices.

Spot silver fell 1.7% to USD 18.53 per ounce, bound for its eight straight weekly decline.

Platinum shed 0.3%, to USD 869.56, while palladium XPD= rose about 5% to USD 1,986.50, en route to an about 9% gain for the week.

(Reporting by Ashitha Shivaprasad and Arpan Varghese in Bengaluru; Additional reporting by Arundhati Sarkar and Rahul Paswan; Editing by Paul Simao and Krishna Chandra Eluri)

Dollar tests supports vs yen, needs a PMI beat to avert bigger retreat

July 22 (Reuters) – USD/JPY fell with Treasury and government yields across the major economies, save for BOJ-corralled JGBs.

Global growth prospects have dimmed amid inflation, broadening central bank rate hikes and below-forecast S&P Global July PMIs in Japan and Europe, leaving the U.S. PMI reading as the last defense against a broader USD/JPY fall.

Prices are already probing below the 21-day moving average and daily on-close pivot point supports at 136.76/69, with the 38.2% Fibo of the post-June Fed meeting range at 136.56.

A close below those supports, particularly if U.S. PMI also comes in weaker-than-forecast, as Japan and the euro zone readings did, would put in play the daily kijun, now at 135.77, and perhaps the 55-DMA at 133.22.

Key is whether today’s dive in bund and Treasury yields versus nearly static JGB yields lowers the terminal Fed funds rates further in the wake of Thursday’s weak U.S. data and the ECB’s belated 50bp flail at inflation and doubts about the structural inertia of its TPI anti-fragmentation plan.

If U.S. PMI data beat that could cushion USD/JPY’s fall and broader risk-off flows, but top-heavy daily and weekly charts put the burden of proof on bulls ahead of Wednesday’s Fed meeting.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)

US equity funds post biggest weekly outflow in five weeks

July 22 (Reuters) – US equity funds witnessed their biggest weekly outflow in five weeks in the week to July 20, as cautious investors gear up ahead of the Federal Reserve’s policy meeting next week.

According to Refinitiv Lipper data, US equity funds recorded USD 8.45 billion worth of net selling, which was the biggest weekly outflow since June 15.

The Fed is expected to raise policy rates by another 75 basis points at the end of the July 26-27 meeting, as it seeks to balance the risks of a stubbornly high inflation and the likelihood of a recession.

US growth funds booked outflows of USD 3.46 billion after small purchases in the week before, while investors exited value funds worth USD 1.62 billion in a fourth subsequent week of net selling.

Selling in bond funds stood at a net USD 4 billion, much higher than the outflows of USD 371 million in the previous week.

Investors disposed of US municipal bond funds of USD 897 million, marking their first weekly net selling in three weeks, while US taxable bond funds recorded outflows of USD 3.43 billion.

US short/intermediate investment-grade funds, short/intermediate government & treasury funds and high yield funds suffered outflows of USD 3,008 million, USD 1,998 million and USD 1,060 million, respectively.

Meanwhile, money market funds lured a third weekly inflow of USD 4.28 billion, although purchases reduced by about 57% from the previous week.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Shailesh Kuber)

Oil prices steady after sharp declines on weak US demand

MELBOURNE, July 22 (Reuters) – Oil prices were roughly unchanged in early trading on Friday after sliding around 3% in the previous session on weakened demand in the United States, the world’s top oil consumer, and a pick-up in supply from Libya.

Brent crude futures rose 17 cents, or 0.2%, to USD 104.03 a barrel at 0041 GMT, while US West Texas Intermediate (WTI) crude futures were flat at USD 96.35 a barrel.

WTI has been pummeled over the past two sessions after data showed that US gasoline demand had dropped nearly 8% from a year earlier in the midst of the peak summer driving season, hit by record prices at the pump.

“At 8.52 million barrels per day, demand is at its lowest seasonal level since 2008, as high gasoline prices take their toll on consumers,” ANZ Research analysts said in a note.

The drop in WTI put the contract on track for a 1.3% drop this week, which would be its third consecutive weekly loss.

In contrast, signs of strong demand in Asia propped up the Brent benchmark, putting it on course for its first weekly gain in six weeks.

Demand in India for gasoline and distillate fuels rose to record highs in June, despite higher prices, with total refined product consumption running at 18% more than a year ago and Indian refineries operating near their busiest levels ever, RBC analysts said.

“This signals much more than a strong recovery from COVID-plagued years,” RBC analyst Michael Tran said in a note.

On the supply side, the restart of output at several oilfields in Libya this week kept a lid on Brent’s gains.

Meanwhile the European Central Bank (ECB) raised rates more than expected on Thursday looking to rein in inflation, with ECB President Christine Lagarde warning that inflation risks had intensified, with the Ukraine war likely to drag on and energy prices likely to stay high for longer.

“Is the horizon clouded? Of course it is,” Lagarde said.

However, she said, the central bank’s base case is there will be no recession this year or next year.

(Reporting by Sonali Paul in Melbourne; Editing by Kenneth Maxwell)

US yields slide on weak data, ECB move

NEW YORK, July 21 (Reuters) – US Treasury yields fell on Thursday, with the benchmark 10-year note below 2.9%, weighed by soft economic data and after the first interest rate hike in 11 years by the European Central Bank turned investors’ focus toward an economic slowdown.

The 16 basis points drop in the 10-year yield was its largest for any day since March 2020.

The number of Americans enrolling for unemployment benefits rose last week to the highest in eight months and a gauge of factory activity slumped this month, the latest indications the US economy is slowing under the weight of rising interest rates and high inflation.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis points move, as concerns about runaway inflation trumped worries about growth.

But even as the ECB moved more than expected, the terminal rate was not changed.

“(ECB President Christine) Lagarde said that the size of the move today does not mean that we’re going to necessarily see a higher terminal rate, and I think the market focused on that mostly,” said Ben Jeffery, rates strategist at BMO Capital Markets in New York.

He said the ECB’s move took any lingering pressure away from the Federal Reserve to raise its benchmark overnight interest rate next week by more than the expected 75 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 16.5 basis points at 3.085%.

The yield on 10-year Treasury notes was down 15.9 basis points to 2.877%. The yield on the 30-year Treasury bond was down 12.2 basis points to 3.048%.

The two- and 10-year Treasury notes yield spread, seen as an indicator of economic expectations, was at -21.0 basis points.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.59%, after closing at 2.682% on Wednesday.

(Reporting by Rodrigo Campos; Editing by Paul Simao and Jonathan Oatis)

Gold bounces back as dollar slips, economic risks grow

July 21 (Reuters) – Gold bounced off a one-year low on Thursday after gaining more than 1% as the dollar eased and persistent economic concerns boosted bullion’s safe-haven appeal.

Spot gold was up 1% at USD 1,712.61 per ounce by 1636 GMT, after hitting its lowest since March 2021 at USD 1,680.25.

US gold futures rose 0.6% to USD 1,711.00.

Helping gold’s uptick, the euro jumped against the dollar before paring gains. The European Central Bank raised interest rates by more than expected as inflation concerns trumped growth considerations, even as the euro zone economy reels from the Ukraine crisis.

The geopolitical risks over Ukraine, higher energy prices and massive amounts of debt are all driving buying interest in gold though, said Daniel Pavilonis, senior market strategist, RJO Futures.

The dollar retreated, making gold more attractive for overseas buyers.

But overall, gold has declined more than USD 380 since early March as the dollar’s recent rally added to headwinds from aggressive rate hikes, which decrease the opportunity cost of holding the non-yielding asset and dim its safe-haven lure.

“Gold remains caught between elevated inflation, growing concerns over a recession and a flight to quality on the one hand, but sharp rate hikes, a strong USD and seasonally weak demand on the other,” said Standard Chartered analyst Suki Cooper.

The US Federal Reserve is expected to raise rates by 75 basis points next week.

“The current rally would be short-lived as the Fed is expected to be pretty aggressive and the dollar might hold its strength,” said Chris Gaffney, president of world markets at TIAA Bank.

If the Fed signals they’re done with the real aggressive moves, we could see “an opportunistic rally in gold” but it will be pressured until then, Gaffney added.

Silver rose 0.7% to USD 18.78 per ounce, platinum gained 2% to USD 874.98, while palladium XPD= was up 1% at USD 1,880.48.

(Reporting by Arundhati Sarkar, Arpan Varghese and Ashitha Shivaprasad in Bengaluru; Editing by Krishna Chandra Eluri and Devika Syamnath)

Gulf bond hopefuls wait in the wings after first-half plunge in volumes

DUBAI, July 21 (Reuters) – Middle East companies waiting for a favorable window to sell bonds face some tough choices in terms of when to tap the market, a situation that has already contributed to an 80% plunge in issuance volumes in the region in the first half.

Some issuers in the Gulf, which typically makes up some 40% of emerging market bond sales, have pounced on windows of relative market stability to get deals done.

But many have shelved or delayed plans while they wait for lulls in market volatility driven by the Ukraine war and for clearer signals on the global economy.

That includes Saudi Arabia’s sovereign wealth fund PIF, which said last year it planned to debut in the market with green bonds. The Saudi government had also said it would issue green bonds while Qatar said it might tap the market opportunistically.

But none have gone ahead so far this year.

Potential issuers have to choose between paying the higher new issuance premiums now or cope with higher interest rates down the line.

“So you’re kind of stuck in a conundrum,” one debt banker in the region said. “Should I issue now and pay up the new issue premium or wait for lower new issue premium but high rates.”

In January, Abu Dhabi oil group ADNOC set up a new debt-issuing entity, but two bankers said the company will wait for better conditions to issue its first bonds.

ADNOC declined to comment.

Others, like an EIG-led consortium of investors in Saudi Aramco’s oil pipeline network, are actively monitoring the market and waiting for a window to issue, three bankers said.

The EIG-led consortium raised USD 2.5 billion in January, shy of the USD 3.5-4.4 billion sought due to choppy markets.

It will now have to take out a USD 10.8 billion loan over a longer timeline than the two or three deals originally planned, two of the bankers said.

A separate consortium, led by BlackRock (BLK), had bought a stake in Aramco’s gas pipelines network, backed by a USD 13.4 billion loan that will need to be refinanced via bonds.

The bankers said the two consortia could sell bonds in parallel rather than wait for the oil pipeline transactions to complete, coordinating via Aramco to ensure they do not take away demand from one another as both deals carry Aramco risk.

Aramco, EIG and BlackRock declined comment.

Meanwhile, Egypt has everything in place to issue dollar-denominated sukuk but significantly higher borrowing costs, and other options, have put that on ice, several sources with knowledge of the situation said.

Egypt’s finance minister, in media interviews in the last two months, said the country was also considering issuing bonds denominated in Chinese yuan.

Oman is also exploring bond options, including issuing dollar Islamic bonds or sukuk, two bankers said. Oman’s finance ministry did not respond to a request for comment.

“I think there’s a good mindset now where you don’t want to miss a window,” the debt banker in the region said. “And the smart move is to be ready and make sure you make best use of this window that’s going to come.”

One window late last month allowed a flurry of deals, including perpetual notes of USD 300 million by Dubai’s Mashreqbank MASB.DU, USD 400 million by Qatar Insurance and USD 500 million by retail operator Majid Al Futtaim. Saudi developer Dar Al Arkan issued USD 400 million in sukuk.

HIGH PREMIUMS

In the first half of the year, Gulf issuance volumes dropped to USD 15.3 billion, based on Refinitiv data, with 35 bond deals compared with 95 a year earlier.

The wider Middle East, where the Gulf makes up the bulk of issues, had 37 deals, down from 101, with volumes down 80%.

“New issue premiums were significantly higher than what they were accustomed to,” the debt banker said.

The region was paying between zero and five basis points on new issue premiums and now faces “anywhere between 10-15 basis points for the best credit, and… closer to 50 basis points for the more challenging credits,” the banker said.

The steep drop in issuance from the region was despite Gulf bonds outperforming broader emerging markets, shedding some 11% in the year to July 15, while EM bonds dropped around 18.5%, one bonds analyst said.

Gulf loan volumes fell 31% and Middle East volumes slipped 38% in the first half, based on Refinitiv data, showing bank debt was considerably more attractive to issuers as interest rates on loans take longer to adjust to the market.

(Reporting by Yousef Saba. Editing by Jane Merriman)

Dollar bulls hope Fed changes rate hike gear again

July 21 (Reuters) – US dollar bulls hope the Federal Reserve springs a surprise and raises interest rates by a larger-than-expected 100 basis points next week, as this could spur further greenback gains.

Only four out of 102 economists polled by Reuters forecast a 100-bps Fed hike on July 27. The other 98 expect an increase of 75 bps.

Interest rate futures currently suggest there is a 21% chance of the Fed raising rates by 100 bps on July 27, down from 86% last Thursday (24 hours after hotter than expected US June inflation data).

The Fed has changed gears twice since it kicked off its rate tightening cycle with a 25-bps increase in March, with May’s 50-bps hike followed by a 75-bps rise last month.

IMM speculators upped their net USD long position by USD 3.04 billion to USD 16.69 billion in the fortnight ended July 12 (ahead of the hot US inflation data).

(Robert Howard is a Reuters market analyst. The views expressed are his own)

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