Hiccup in Gilt Yields in Response to Stubborn Service Sector Inflation

U.K. inflation hits the BoE’s target but services remain lofty

Highlights

• U.K. inflation hits the BoE’s target but services remain lofty

• A U.S. fiscal train wreck looms

• Nvidia surpasses Microsoft to become the largest U.S. company

• Leave the R-star debate to the academics

While We Were Sleeping

U.S. markets are closed today in observance of the Juneteenth holiday. But other exchanges around the world are open — Europe is flat but Asian equities staged a nice recovery: Hong Kong (+2.9%), Taiwan (+2.0%), Korea (+1.2%) and Japan’s Nikkei 225 (+0.2%). China’s Shanghai Composite was an exception, losing -0.4%.

Bond markets are quiet for the most part, outside of a pair of +3 basis point increases in 10-year yields in the U.K. (4.08%) and Australia (4.18%). The move in U.K. inflation in May down to the BoE target of 2.0% from 2.3% in April (for the first time in three years) was widely dismissed (mostly because the services component remained stubbornly high at +5.7% YoY — while down a touch from +5.9% in April, investors were hoping for something closer to +5.5%). The core rate of inflation paints a different picture, coming in at +3.5% year-over-year. Ergo, futures are now pricing in just a 30% chance of a U.K. rate cut in August, down from 45% before the data were released. The JGB market, meanwhile, has a mild bid, with the 10-year rate dipping -1 basis point and threatening to make a move back below 0.90% for the first time since early May.

There were no big shifts in the FX market with the DXY dollar index stuck at the 50-day trendline at 105.25. On the commodity front, Brent crude is stabilizing at a seven-week high of $85 per barrel, spot gold is little changed and Bitcoin has rebounded +0.5% to $65,214. The April-May copper bubble has been pricked, just as the nickel short squeeze was two years ago, with the red metal sliding -11% from the peak of a month ago as China reportedly is dumping its excess inventory (biggest glut in four years) in the world market — see China’s Copper Glut Swells in Sign of Sluggish Economy on page 8 of today’s FT. The country exported more copper than ever before this past month (all market quotes are time-stamped to 4:30 a.m. ET).

In addition to the CPI data, the U.K. also published a set of relatively tame PPI numbers — the input price measure was flat sequentially while output prices dipped -0.1% (the former at -0.1% YoY and the latter at +1.7%). Again, it was the core CPI and the services segment that have dominated market sentiment today.

The must read of the day — and rather disturbing — goes to page B5 of the NYT: U.S. Debt on Pace to Top $56 Trillion Over Next 10 Years. This is something that the next Congress is going to have to confront — if left unchecked, and neither party is remotely running on a fiscal probity platform, the U.S. debt-to-GDP ratio will soar to 122% from 99% currently. The equity market would love nothing more than to see the Trump tax cuts get extended but that would cost the federal government $5 trillion over the next decade. The Democrats are bound to embark on a spending spree even beyond the runaway entitlement expenditures related to Medicare and Social Security, not to mention Joe Biden’s aim to provide tax relief to low- and middle-income households alongside a $100 billion cancellation of student debts. This is a fiscal train wreck that will only be resolved once America is shocked into it by a financial event, as was the case in Canada in the mid-1990s.