Business research

The markets today: A significant risk, again?

Rising US yields along with a further drop in the Euro have the USD in DXY terms now at its highest level since September 2002.


Today’s Podcast

Overview upside down

  • US yield curve 2/10s more inverted after ISM, JOLTS, FOMC Minutes
  • Minutes show many see need for ‘even more restrictive stance’
  • Euro weakness on energy concerns drives USD (DXY) to new 20-year high
  • British Prime Minister Johnson’s seemingly imminent demise doesn’t hurt the pound
  • AU Trade, Weekly Unemployment Claims in the US Today

This world keeps spinning and there’s no time to lose, Well, everything keeps spinning, spinning round and round and upside down – Jack Johnson

US bond yields are higher across the curve in the past 24 hours, but even higher ahead with Tuesday’s 2/10 Treasury curve reinversion now steeper at -5 points basic. Rising US yields coupled with a further decline in the Euro puts the USD in DXY terms at its highest since September 2002. US equities posted small gains (after much larger and somewhat surprising gains in Europe ) in a somewhat mixed backdrop of incoming US data.

There is still a lot going on in the markets, no more than in bonds where the DISPLACEMENT Index (the equivalent of the VIX on the US equity market) is still very high close to the highs of this week and which are the highest levels since the GFC. Overnight, we saw 10-year yields extend their Tokyo session gains to 12 basis points on Tuesday in New York near 2.93% and 2 points from a bigger 18 points at 3.00 %.

Helping bond moves and a more inverted curve was the June just released FOMC minutes, where the standout phrase seemed to be that “Many considered it possible that an even more restrictive stance might be appropriate if elevated inflationary pressures were to persist.” The minutes signal a further increase in the FOMC’s central inflation projections in the next analysis of the quarterly forecasts and make it clear that the July rate decision is around 50 or 75 basis points (and where some number of FOMC members have of course been absent over the past fortnight to nail their colors to the +75bps mast).

Support for higher yields has also been a Services ISM report better than expected , with the stock coming in at 55.3 slightly down from 55.9 but above the 54.0 expected. Most of the sub-indexes were slightly lower, covering new orders, export orders, price paid (at a 9-month low) and employment (under-50 for the first time since January at 47 ,4). But overall activity grew by 1.6 points and delivery times from suppliers lengthened slightly, pointing to persistent supply bottlenecks (longer wait times for a table at your favorite restaurant, maybe -be ?).

We also had the last BLOWS report – a Fed favorite – and although for May is still a bit dated, showed 11.3 million vacancies, against an upwardly revised April reading of 11.7 million and meaning that there is approximately two job offers for very high unemployed – indicative of a labor market that is still very tight. The Australian equivalent, by the way, is about 0.9 vacancies per unemployed person currently in the labor force.

A mixed picture, by sector, for US stocks with the weak overall gain (0.36% for the S&P 500 and 0.35% for the NASDAQ) driven by a rise of 1% for the utilities sub-index and 0.9 for the information technology , while energy is down 1.7% (oil lost another $1-2 on Wednesday) and financials and consumer discretionary close with losses of around a quarter of a percent.

In currencies, EUR/USD’s further slide, another 0.8% to 1.0162 low, means the The DXY USD index reached a new high in September 2002 at 107.3 (107.1 now) and where fears of a major EU energy supply crisis due to the potential loss of Russian gas soared to the top of the EUR forex market narrative this week. All other G10 currencies are also weaker against the strong greenback, but USD down just 0.4% at 0.6771, holding above this week’s lows near 0.6760.

Perhaps to some surprise, The GBP is one of the currencies least impacted by the strength of the USD, down just 0.2%, albeit at its lowest levels since March 2020 and now languishing below $1.20 (1.1922). This despite the new policies, where the resignation (at last count) of 38 other Tory MPs from the government means the Almost certain departure of embattled Prime Minister Boris Johnson of 10 Downing Street. The only question is whether this follows his resignation or a rule change by the 1922 backbench committee which will allow a new leadership challenge (currently allowed only 12 months after the last). If there is one, he will lose.

One of the reasons sterling is not doing too badly is that a new Conservative government and a new Chancellor will accelerate fiscal easing (tax cuts) potentially mitigating the current blow to the economy by falling real incomes. Another is more fairly belligerent incoming speech from the BoE, with Chief Economist Pill saying he was ready to “adopt a faster pace of tightening” in August, although dependent on data until then, and Deputy Governor Cunliffe saying the Bank “will do whatever which is necessary” to contain inflation.


  • Australia’s trade balance in May is expected to post another large surplus, following the $10.5 billion read in April. We are looking for a surplus of $11.5 billion (consensus $10.725 billion), the expected improvement due to higher coal and LNG exports. On the services side, the beginnings of a return in inbound tourism support services export volumes and trade in services are expected to continue to rise from their pandemic lows as tourism flows further normalize.
  • German industrial production for May should be +0.4% over the month (-1.8% y/y vs -2.2% in April).
  • ECB Chief Economist Lane is due to speak at 10:45 a.m. but on “accelerated green transitions in the post-Covid era: what are the implications for productivity”. Not a driver of the EUR market!
  • In the United States, we have what we now describe as one of the new “glamorous statistics” – weekly US jobless claims. We say this is one of the best leading indicators of a falling labor market/rising unemployment and which, unfortunately but inevitably, is an intermediate goal of policy, being a prerequisite for reducing unemployment. ‘inflation by reducing the risk of integration’ ‘second-round effects via wage demands incompatible with the Fed’s 2% inflation target.

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