The surprise unnerved money markets and saw futures shift the chances of another Reserve Bank tightening this year to 60% from next to zero prior to the report. Deutsche Bank’s economists, for example, quickly shifted their call to see an RBA hike to 4.6% as soon as its next meeting in August.
An Aussie outlier perhaps? Along with Japan, another rate rise would make Australia only the second G10 central bank to lift borrowing costs this year – with the euro zone, Switzerland, Sweden and Canada all having headed the other direction.
But Canada, too, had a sobering inflation update on Tuesday.
Consumer price growth there took an unexpected turn and picked up pace to 2.9% in May – stalling what had been pretty consistent disinflation process since start of the year and forcing markets to cut back hopes of another Bank of Canada rate cut next month to below 50%.
With a mixed bag of U.S. economic updates this week, the overseas price picture may feed greater caution ahead of PCE release.
Well-known Fed hawk Michelle Bowman said holding U.S. policy rates steady “for some time” should be enough to bring inflation under control but the Fed governor also repeated her willingness to raise borrowing costs again if needed.
Although Bowman’s view probably doesn’t represent consensus Fed thinking, it’s still an uncomfortable contrast with the near two rate cuts still priced into the futures curve.
And Treasury yields have started to nudge higher again in another week of heavy debt sales. Treasury has scheduled $183 billion in coupon debt to be auctioned this week, split between the two-year notes and five- and seven-year notes to be sold on Wednesday and Thursday.
So far, the paper has sold with ease. Some $69 billion of 2-year notes were snapped up on Tuesday at a high yield of 4.706% – about 5 basis points below where they were trading at the close of bidding.
Briefly befre the auction, the 2-to-10 year yield curve hit minus 52bps – its most inverted of the year.
And, Aussie aside, the picture has generally boosted the dollar – not least against Asia’s ailing currency giants the yuan and the yen.
China’s offshore yuan weakened to a fresh seven-month and has now lost almost 3% since the start of the year. Dollar/yen, meantime, nudged further into what traders consider intervention territory as it topped 160 for the first time since the Bank of Japan last stepped in April.
