The market has quickly moved beyond strong US economic data and is shifting focus to softening CPI.
The bond market is leading the shift with US 2-year yields down 9.8 bps to 4.91%. It’s a quick turnaround for the front end of the curve after hitting the highest since 2007 yesterday.
There was something of a fat-finger down to 4.75% right on the non-farm payrolls release but after a bounce to 5% in the aftermath of the report, yields have been falling steadily.
The pressure on yields is spilling over into the US dollar, which has been sold particularly hard against the yen today and British pound. Both are now near session extremes and that’s pushed the pound towards the June highs.
The market is pricing in a terminal rate of 6.38% in the UK, which is the highest among G7 countries and is a number that would beckon financial stability problems or a hard landing later. But inflation is particularly high in the UK and that’s what the market is focused on.
For the dollar more broadly, I get the sense that everyone is setting up for CPI. The consensus is 3.1% y/y but there’s a chance it could land with a 2-handle and that would start to raise the victory flag on inflation.
There are also questions about the yen. A top BOJ official pushed back today on the idea of dropping yield curve control but at some point the BOJ needs to at least get back to neutral, especially if the global economy continues to look strong.