Market was long into the print but there isn’t much to get anxious or excited about coming out of it imo. Meituan is under pressure in China (-12%...food delivery competition). SHCOMP HSI weaker for a second day, while NKY futures are higher (Berkshire increasing its stake in Mitsubishi Mitsui). "Japan's Ministry of Finance (MOF) is considering trimming its issuance of super-long bonds (20-, 30-, and 40- year)" (BBG) Russell futures bid as liquidity bubble rolls out of tech and into the rest of the market.
There was some pushback on rate concerns yesterday. Bond vol struggled to hold a bid despite a somewhat softer US 5yr auction. Japan’s 2yr auction overnight was the weakest since 2009(German 7 year technically uncovered yday). Fixed income view seems to be that US Treasury willingness to ramp buybacks, fueled by bill supply, is acting as a weak form YCC.
At 5% in the back end, the market is comfortable taking the other side. Hence, despite concerns that the Fed is losing some semblance of independence + global fiscal concerns including French Japan UK...rate vol remains incredibly suppressed. Against this backdrop, inflation expectations are logically picking back up—partly due to term premia and credibility questions, but also on improving growth. Survey data for August inflected higher in both manufacturing and non- manufacturing in the US.
On the consumer side, anecdotes suggest an improvement. Scott Fieler (US consumer spec sales): “Most companies we have heard from have spoken about a strong finish to 2Q (for those with a July quarter end) and a strong start to 3Q (August). Just some of those who have done so recently are: ROST TJX (strong start to 3Q), ANF (strong back-to-school trends), KTB, WRBY, SN, YETI all constructive on July trends, TPR noted Coach accelerating QT, AS said very strong trends continuing into 3Q, WMT spoke to consistent strength through the quarter into 3Q, HD said July was their strongest month and early August showed similar “momentum” With front-end rates anchored by the Fed’s dovish pivot, real rates are falling fast, sending TIPS on a breakout (see side-note).
That said, there’s limited room for more to be priced. With terminal rates close to 3%, consensus is that without a sharp labor market deceleration (waiting for next NFP), the risk reward looks poor to press short term rates further.
Perhaps that’s why the dollar trade is stalling even with all these Fed concerns. If the inflation mix continues inching higher with markets at all-time highs, real rates may have to do the harder work to move fx.
