Despite the weak report from U. Michigan on Friday and unsettling economic update from China on GDP and production on Monday, markets are busy pricing in even more high future inflation. The slide in long-dated Treasury yields last week was apparently a pullback, as the yields are back to local high 1.62% on Monday. There is a high chance of more selling on long-end of the yield curve with possible breakout of 10Y yields towards 1.65%, which in turn should propel USD gains:
The sharp upward move in 2Y bond yield on Monday draws particular attention – the bond yield, which primarily react to changes in expectations related to the Fed's policy (since the Central Bank predominantly controls short rates), rose by 4 bp at once. up to 0.446% - could be quite a profound review of Fed policy expectations:
Oil continues to trend higher, and in general, the "commodity supercycle ", as it was dubbed, does not seem to end. Buying pressure is being felt in other commodities as well, with the Bloomberg Commodities Price Index hitting a new high of 105.10 on Monday.
The dollar looks steady amid falling bonds, the US currency index is trading above 94 points. Risk assets were again under selling pressure amid growing bond yields. Under the influence of more and more signals about accelerating inflation, the markets are revising the pace of tightening of central banks' policies towards a higher one. First of all, this concerns the Fed, where some officials openly express fears that temporary inflation will turn into structural, therefore, the policy should be tightened.
Data on the Chinese economy on Monday fell short of expectations, with industrial production up 3.1% in September on an annualized basis, well below the 4.5% forecast. At the same time, retail sales exceeded the forecast, however, given the concerns of investors about the rise in raw materials prices, production data should be more worried about. The weakening of production growth rates may be the first wake-up call for the commodity market, which, as we can see, is at historic highs and has recently shown quite high growth rates.
When can we expect a correction in the commodity market? It may make sense to keep an eye on manufacturing PMI and manufacturing price indices in developed economies - a synchronous deterioration may indicate that high costs are forcing a revision of production plans downward, which will also affect the demand for commodities. However, first of all, the backlog times and delivery times sub-indices will need to be normalized in the PMI data. These supply-side constraints make a significant contribution to persistence of commodity inflation.
A chance for a rebound in EUR, GBP against the dollar may appear on Wednesday, when inflation data is released. They will clarify the chances that the Bank of England or the ECB will move to more aggressive tightening, which will take away the advantage of the dollar in the form of a growing differential in real rates.