Japan's 10-Year Bond Yield Hits 13-Year High; Nikkei Average Sinks

Economic

Bond

Summary:

Japanese stocks and bonds fell as investors worried about higher US interest rates. The yen also weakened against the dollar.

Thursday has been a busy day for traders and investors in Japan's financial markets as the 10-year government bond yield rose to a 13-year high, the Nikkei Stock Average was down by more than 2% at one point, and the yen touched its lowest point in four weeks against the dollar.

Speculation that the U.S. Federal Reserve will keep its policy rate higher for longer has grown among investors, weakening demand for bonds globally. Bond prices move inversely to yields. The less dovish view on Fed policy has triggered a sell-off of risk assets such as stocks. Meanwhile, the growing yield gap between the U.S. and Japan is weighing on the yen.

The 10-year JGB yield climbed to 1.1% at one point Thursday, up 0.025 percentage point from the previous day's close, reaching its highest level since July 2011. Bargain hunting later pushed the yield back down to 1.055%.

The Nikkei Stock Average plunged 939.87 points, or 2.4%, to 37,617.00, its lowest level intraday since April 26. The average closed at 38,504.13, down 502.74 points, or 1.3%, from the previous day.

The yen fell to 157.78 against the dollar during U.S. hours, a four-week low.

Demand for seven-year Treasurys was weak at an auction on Wednesday, as investors became cautious over rising interest rates after several Fed board members made hawkish comments.

In its Beige Book survey of regional business, the Fed said the U.S. economy has expanded at a "slight or modest" pace since early April. Investors took this as evidence the U.S. central bank will keep interest rates higher for longer. The 10-year Treasury bond yield in the U.S. market rose to 4.610%, a four-week high.

"Ahead of a 10-year JGB auction scheduled for next week in Japan, concerns over weak bond demand has loomed, pushing up the yield," said Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan.

Growing sentiment that the Bank of Japan will further tighten monetary policy to tame yen weakness and import price inflation has also contributed to the JGB yield's rise. Analysts predict the central bank may cut bond purchases and raise its policy rate in upcoming meetings, with the next gathering scheduled for June 13 and 14.

Inflation in Germany accelerated to 2.8%, year-on-year, in May from 2.4% in April. Some investors have begun speculating that the European Central Bank may also have to slow the pace of interest rate reductions, leading to a bond sell-off. The ECB is scheduled to meet on June 6.

In the Tokyo stock market, semiconductor-related shares are performing poorly. Japanese chip tool maker Tokyo Electron and testing equipment maker Advantest fell 3.5% and 7.2%, respectively, at one point.

Source: NikkeiAsia

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Swissquote

Economic

Market mood further darkened yesterday following another round of weak Treasury sales in the US. The 7-year note failed to attract enough demand on Wednesday. The 2 and 5-year auctions also saw weak demand earlier this week. The US treasuries remained under pressure. The 2-year yield – which best captures the Federal Reserve (Fed) rate expectations – shortly hit the 5% psychological mark, the 10-year yield spiked to 4.63% and the US dollar index advanced to the 50-DMA and is consolidating near that level this morning.

Things could get better or worse in the coming hours. The Fed's Beige Book revealed yesterday that the US economy expanded at a ‘slight or modest' pace since April, while consumers pushed back against higher prices. The latter would be ‘good news' for the Fed – who desperately needs the US consumer demand to slow in order to progress in what they call the ‘last mile' to hit their 2% inflation target.

All eyes are on the US GDP update due today, and the Fed's favourite gauge of inflation – the core PCE number – due tomorrow. The US GDP is expected to have slowed significantly in the Q1, with – however – a significant rise in price pressures (that's already priced in), while the core PCE print for April could hint at some easing in the latest pickup in inflation. The best outcome would be a reasonably soft growth coupled with easing price pressures, but we could realistically get a slowing growth coupled with an insufficient easing in price pressures, instead.

To the Fed, the inflation number will matter more than the growth update as regardless of the deteriorating economic growth, the progress in inflation will determine whether the Fed could remain on path to cut rates this year. Therefore, it will be hard to interpret today's GDP data before seeing tomorrow's PCE print. And even then, Citigroup thinks that this week's data will trigger limited price action; the upcoming US jobs and CPI updates in the next weeks will matter more.

For now, the rising yields are taking a toll on stock valuations in the absence of other – and positive – catalysts. The S&P500 slipped below the 5300 level yesterday, and Nasdaq retreated. The US futures are in the red this morning, as Salesforce tumbled 16% in the afterhours trading after reporting a weaker-than-expected revenue growth in Q1 and after giving a softer-than-expected outlook.

Inflation is picking up beyond US

Released yesterday, the Australian inflation unexpectedly rose in April and the German inflation came in worse than expected. It appears that inflation in Germany rose from 2.4% to 2.8% in May, more than 2.7% penciled in by analysts. The German 10-year yield advanced to the highest levels since last November and the Stoxx 600 tanked more than 1% yesterday. Spain and Italy will release their inflation updates today, France tomorrow and we will have the aggregate CPI for the entire Eurozone tomorrow morning. Unless we see a big surprise – which I don't think will happen, the European Central Bank (ECB) will probably announce a 25bp rate cut next Thursday. But an inconvenient rise in Eurozone inflation will likely vanish the expectation of a second rate cut in July.

If the Fed cut expectations vanish faster than the ECB cut expectations, the EURUSD should remain under pressure for further downside correction. The pair slipped below the 100-DMA yesterday, below the 1.08 this morning and is preparing to test the 200-DMA support at the time of writing. A sufficiently soft US growth and inflation figures could throw a floor under the EURUSD's selloff but the divergence between the Fed and the ECB remains supportive of a deeper downside correction.

In precious metals, gold extends losses against a broad-based strength in the US dollar and the rising treasury yields. But the central bank uncertainties, geopolitical tensions and rising risk aversion could limit the gold selloff near the $2300 per ounce level.

Oil fails to clear key resistance

Happily, for everyone who doesn't have a positive exposure to energy and energy stocks, oil prices don't gather enough momentum above key resistance levels to further fuel the inflation worries. US crude for example sees decent resistance above the $80pb level as the waning rate cut expectations from major central banks weigh on global oil demand outlook and give the bears a good reason to remain in charge near the critical $80pb resistance. The ugly geopolitical situation in the Middle East does trigger short-term price spikes, but price rallies due to geopolitical tensions tend to remain short-lived.

Oil's inability to gain a sustainable positive momentum is weighing heavily on energy stocks. Exxon retreated to the lowest level since March yesterday, as Chevron extended losses below the ytd bullish trend base. ConocoPhillips tumbled more than 3% on news that it will acquire Marathon Oil through a $17bn all-stock deal, while Marathon Oil jumped more than 8%.

The ongoing consolidation in the Permian Bassin will help the US oil companies benefit from synergies and scale economies, and help them squeeze higher profits from their operations. At one point, the correction in energy companies' share prices will become interesting for investors regardless of the economic and central bank prospects. If inflation eases, softer central bank expectations will boost the reflation trade, benefiting oil companies. If inflation doesn't ease and central banks hold off on rate cuts, Big Oil's juicy dividends and buybacks will attract investors seeking extra revenue to navigate the rising inflation tide.

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FastBull Featured

Remarks of Officials

Atlanta Fed President Raphael Bostic said on May 29, local time, as follows.

The "explosive" price pressures seen during the pandemic are expected to normalize over the next year, but we still have a long way to go.

Inflation is still high, and a slowdown in inflation would help me gain the confidence I need to cut interest rates. We can see from recent data that many different inflation indicators are coming down to their target ranges.

I may consider a rate cut in the fourth quarter of this year if the economy evolves as I expect and inflation comes down, the labor market slows, and the economy grows steadily.

Bostic had similar remarks in his speech last week, "Inflation will come down at a slower pace than last year, and only one rate cut is expected this year, which will occur during the October-December period."

Fed officials have kept interest rates within the 5.25%-5.5% range since last July. Most officials are now taking the stance that they need to see more evidence before they support a rate cut. Minneapolis Fed President Kashkari even said in recent days that he would not rule out a rate hike.

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Cohen

Economic

Houses for sale in Britain hit an eight-year high in May in another sign the UK property market is recovering from last year’s slump, even as prospective buyers remained cautious due to high finance costs.

New housing supply is growing faster than agreed sales on improved optimism, according to a report by property portal Zoopla. The average UK estate agent had 31 homes for sale in the four weeks through May 19, the most since the firm started collecting such data in 2017 and a 20% increase from the same period a year earlier. That suggests homeowners are regaining confidence after last year’s interest-rate increases prompted many to delay listings.

Sales of family homes are recovering quickly after a chronic supply crunch during the pandemic, the Zoopla report showed. A rebound in sales of houses with more than three bedrooms boosted the total value of property on the market to £230 billion ($293 billion) in May, Zoopla said. That’s £45 billion more from a year ago.

UK Homes for Sale Hit Eight-Year High, But Buyers Stay Cautious_1

However, while a much-needed increase in supply is likely to keep house price inflation stable, buyers are still treading carefully as mortgage costs remain near the highest in four decades. The number of sales agreed in May increased 13% year-on-year, but across most regions buyer confidence seems to be lagging behind those with a property to sell. Almost a third of homes currently available for sale were also listed for sale in 2023 but failed to find a buyer.

Persistent problems with affordability are holding back buyer demand. The average UK house cost around nine-times average earnings in late 2022, the highest since 1876.

With the latest British inflation reading coming in stronger than expected, the prospects of a cut in interest rates in June have faded. That means the cost of borrowing remains an obstacle for many aspiring home buyers despite a slight drop in mortgage rates from last year’s highs. Some big lenders have also increased mortgage rates recently in response to rising swap rates, which are used to set the bulk of mortgage products.

UK Homes for Sale Hit Eight-Year High, But Buyers Stay Cautious_2

Though national elections, set for July 4, are set to slow the pace of new home sales in coming weeks, the impact of the earlier-than-expected polls is likely to be less influential than previous election periods, Zoopla said, citing the lack of a significant policy divide over housing between the UK’s two main political parties. Sales completions over 2024 may now fall slightly short of the 1.1 million previously forecast for 2024, the platform said, with UK house price inflation expected to stay flat this year.

Tom Bill, the head of UK residential research at Knight Frank, said that those looking for clues about property prices should track the next inflation data rather than campaign promises of political parties.

“Growing supply is one reason that UK house price growth this year will be limited to low single digits,” Bill said. “However, the main obstacle for buyers is stubborn services inflation, which is keeping mortgage rates high.”

Source：Bloomberg

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Danske Bank

Economic

In focus today

In the euro area, we receive data on the unemployment rate in April. The labour market is still historically strong, and employment grew 0.3% q/q in Q1. We expect the unemployment rate remained unchanged at 6.5%.

In the euro area, we will also look out for Spanish inflation which will give a clue as to where we can expect the euro area HICP print to land tomorrow.

In Japan we get an array of interesting data overnight, which include Tokyo May inflation, April retail sales, and industrial production. As for the Tokyo May inflation, price pressures have muted in Japan recently and Tokyo data will indicate whether this trend continued in May.

In Sweden we get both GDP data for Q1 2024 as well as wages data. We expect the GDP print to come out at 0.5% q/q seasonally adjusted, up from Q4 2023 which saw negative growth at -0.1% q/q, despite a weak (unofficial) indicator. Due to a history of significant revisions to the indicator, as well as the fact that March consumption and production data (released after the indicator) have seen significant increases we maintain our expectation of a decent positive print.

At 09.00 CET we also receive NIER's Economic Tendency Survey, which will yield the latest (survey-based) insights of the Swedish economy including consumer sentiment.

In Denmark we receive gross unemployment figures for the month of April at 08.00 CET.

Fed's Williams (Vice Chair of the FOMC) speaks at 18.05 CET. The ECB commence their ‘silent period' ahead of the 6 June General Council meeting.

Economic and market news

What happened overnight

Asian equity markets are in the red this morning, with the Nikkei in Japan leading the fall, as it is around 1.2% down. The drop in equities comes aback rising yields because of the German CPI figures and another weak UST auction last night, whereas the latter pushed the benchmark 10Y US Treasury yield above 4.60% in the evening, a near one-month high.

US equity futures are all in the red this morning, indicating lower prices by opening bell.

In commodities, gold, silver and copper, metals that have all seen otherwise relatively strong performance in May, takes a breather as they are down this morning between around 0.4% and 1.9%. Brent is trading flat at USD84/bbl.

What happened yesterday

German inflation stood at 2.8% y/y for headline HICP, thus slightly higher than the 2.7% consensus amongst analysts. It is however worth noting that headline inflation was affected by the so-called ‘German ticket', a discount on public transportation which has lowered headline inflation. Given its introduction more than a year ago, the base effects of the discount are no longer affecting the inflation print.

Core inflation remained at 3.0% y/y and was 0.24% m/m seasonally adjusted. Hence core inflation remains on the high side month-to-month. The elevated core inflation is due to services inflation increasing to 3.9% y/y from 3.40% y/y. The momentum in services inflation is key for the ECB, and we see that service prices increased 0.46% m/m seasonally adjusted – above the 0.3-0.4% m/m average seen in the past three months. The 3m/3m seasonally adjusted annualised rate of services inflation thus stood at 4.78%, which is ‘too hot' to yet ‘declare victory over inflation' to paraphrase ECB Chief Economist Philip Lane.

In the euro area, the M3 monetary aggregate rose 1.3% in April from 0.9% in March. A key metric to keep your eyes on for growth outlook is credit provided to the private sector. The lending channel is still recovering, and loan dynamics continue to point to a slight improvement in lending dynamics. Loans to households rose 0.2% in April (prior: 0.2%) whereas loans to non-financial corporations rose 0.3% (prior: 0.4%).

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Warren Takunda

Economic

The New Zealand government forecast a return to a budget surplus by 2027-2028, but warned of an increasingly difficult economic backdrop in the interim with the economy suffering through an extended recession.

The budget deficit is expected to grow in the near term, reaching a deficit of 13.4 billion New Zealand dollars (US$8.2 billion) in 2024-2025, but then narrowing and returning to a surplus of NZ$1.5 billion in 2027-2028, the government said Thursday.

The outlook for GDP growth was revised down in the budget with the economy suffering through a lengthy downturn, bringing with it rising unemployment.

Despite the sluggish economic performance, the Reserve Bank of New Zealand recently warned that interest rates may need to be raised further to finally subdue inflation.

The economy, which has contracted in all but one of the last five quarters, is forecast to contract 0.2% in the year to June 30, according to the budget papers.

Still, some recovery is expected further out as the impact of tax cuts and a recovery in tourism restore some pep, the government said.

On a brighter note, inflation is expected to be back in the RBNZ's 1% to 3% target band by the end of this year, opening a path to lower interest rates.

The economy is forecast to grow 1.7% in the year to June 2025 and averaging 2.9% per annum over the following three years, according to the budget outlook.

Unemployment is forecast to peak at 5.3% at the end of 2024, the government said.

"With inflation pressure abating, interest rates are forecast to begin gradually easing from late 2024, slightly earlier than forecast," the budget said.

"As interest rates ease, domestic activity is forecast to gradually pick up over the second half of 2024 and into 2025 with gradually rising house prices supporting residential investment and household spending," the budget added.

The weaker outlook for the budget balance in the near term also results in net government debt as a percentage of GDP rising to a peak of 43.5% in the year to June 2025, before gradually declining to 41.8% by June 2028 as the outlook improves.

Source: Morningstar

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Thomas

Economic

Forex

The British pound (GBP) is experiencing a significant rise, reaching new heights since Brexit. This increase has pushed the Bank of England's Trade Weighted Index (BoE TWI) past its previous March peak, reaching levels not seen since June 24, 2016, when the pound plummeted following the UK's decision to leave the European Union. This growth is likely driven by rising yields rather than just political changes.

The UK's GDP recovery is stronger than expected, showing resilience after the 2022-23 energy price shock. Recent data, like the CBI Distributive Trades Survey, indicates a robust rebound. In May, retail sales recovered notably after a poor April performance due to bad weather. The Volume of Sales index jumped from -44 to +8, its highest since December 2022, and the Orders Placed index saw its biggest one-month increase since September 2019.

UK GDP

Inflation is also playing a key role. Retailers reported a sharp drop in selling prices in May, with the Reported Selling Price index falling from 54 in February to 20. This is the second-largest drop on record, only surpassed by the early pandemic period in 2020. Lower inflation is likely to boost market sentiment and improve economic data.

Retail Sales UK

GBP Breaks Higher and Reaches New Post-Brexit High – Or Is This Another Media Lie?_2

The Bank of England's cautious approach to waiting for underlying services inflation to decrease may lead investors to expect higher real yields, benefiting the pound in the short term. The British Retail Consortium's data supports this positive outlook, showing retail inflation in early May at 0.6%, the lowest since late 2021. Food inflation is at 3.2% year-on-year, while non-food items are seeing deflation at -0.8%. This is good news for UK consumers, who might see a rise in real incomes.

With continued low FX volatility, the GBP could attract more carry interest. The upcoming UK election is not expected to cause significant uncertainty or volatility. Based on recent CPI data for April, we no longer expect a rate cut in June. The upcoming general election reduces the likelihood of a June cut, but we anticipate a rate cut in August, providing a favourable window for the GBP to perform well.

Adding to this positive outlook, the BoE TWI's new post-Brexit highs are complemented by GBP/JPY breaking through the 200-level, reaching heights not seen since just before the global financial crisis, indicating increased carry demand.