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Happy rail strike day! I guess we get to find out if we really do enter the wage-price spiral phase of this inflation cycle. 

Generally positive start to trading for European equities as the rally off last week’s lows continued early on Tuesday. US futures look firmly higher after yesterday’s holiday for the cash equities. Not a lot on the slate today in terms of economic data, focus on US existing home sales. Crude prices firmed up again on the improved risk sentiment. And after US bond markets were closed yesterday, the 10yr Treasury yield moved higher this morning as European debt markets struggled. Crypto markets firmed up with Bitcoin holding the 78.6% retracement of the 2020-21 rally.  

Fed policymaker James Bullard, about the most hawkish on the FOMC, warned “US inflation expectations could become unmoored without credible Fed action”. I think that is an understatement…they already have. The Fed is taking credible action now and making it clear – in no uncertain terms – that it won’t be done until it sees inflation coming down. Jay Powell beings his Congressional testimony tomorrow.

Whilst everyone is focused on the Fed, ECB and crypto, the Japanese bond market has been quietly going up in smoke with the 0.25% ‘ceiling’ for the 10yr Japanese government bond tested repeatedly last week. More jawboning from PM Kishida overnight, saying the depreciation in the yen is concerning, but it’s not the time to tweak monetary policy. Nothing new in this and when it’s the BoJ that is the source of yen weakness – running counter to every other major central bank bar China – it’s not likely to have much impact. USDJPY trades at 135 this morning, moving closer back to last week’s 24yr high. 

Rising global interest rates have pressured the BoJ’s yield cap, forcing even deeper intervention in the market. A smooth 5yr auction overnight helped but 10yr JGBs are on the move higher again, dragged higher by rising European yields overnight after yesterday’s hot German PPI print, which showed producer prices rose at a record pace of +33.6% in May. The BoJ is now printing at full tilt to defend its yield curve control policy but the market is betting it will have to throw in the towel. 

USD trades a little lighter against the majors. EURUSD has managed to hold 1.05, whilst GBPUSD is also firmer at 1.23. Interesting comments from Bank of England chief economist Huw Pill this morning on sterling, saying they should take into account the exchange rate, though he stressed it is not the target. But given a lot of the inflation in Britain is imported dollar-based inflation – ie rising dollar prices on global markets – the Bank would do well to do more to defend the currency. Catherine Mann, one of the MPC’s hawkish dissenters last week, called for more rapid interest rate rises and warned the BoE was in danger of falling behind the Fed. 

Australia’s dollar also trades a bit firmer this morning. Minutes from the RBA’s June meeting stated that the three-year yield target introduced in March 2020 as part of the Bank’s response to the pandemic “served its purpose of lowering funding costs” but also that the exit from the policy in late 2021 had been “disorderly and…caused reputational damage to the Bank”.

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