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US Treasuries were mixed as front-end yields moved higher while back-end yields moved lower with the curve flattening further. The 2Y and 5Y yields were up over 3-4bp and the 10Y yield was down 1bp. The core PCE price index, the Fed’s preferred inflation gauge, slowed to 4.6% YoY from 4.7%, and below the expected 4.7% print . The headline annual PCE (Term of the Day, explained below) rate dropped from 3.8% YoY from 4.4%, the smallest annual advance in more than two years.
CME probabilities indicate an 87% chance of the Fed hiking rates by 25bp this month. The peak Fed Funds rate stayed unchanged at 5.42%. US equity indices saw the S&P climb 1.2%, while the Nasdaq rallied 1.5% to complete its strongest first half performance in 40 years. The Nasdaq rallied 31% in H1 whereas the S&P saw a 16% rally during the same period. Credit spreads tightened with the US IG and HY CDS spreads tighter by 2.9bp and 16.5bp respectively.
European equity indices closed higher too, with European main and Crossover CDS tighter by 2.8bp and 10.7bp. Asia ex-Japan CDS spreads were 3.4bp tighter and Asian equity markets have opened with gains of 1-1.5% to begin the week.
Personal Consumption Expenditures (PCE) is an inflation metric measuring consumer spending on goods and services, released by the US Department of Commerce. The Fed’s preferred measure of inflation is the Core PCE – this refers to the Headline PCE after stripping out two volatile components, namely, food and energy.
The US also publishes another inflation metric, the CPI (Consumer Price Inflation), another key inflation indicator. CPI and PCE differ on four fronts: formula, weight, scope and other factors. As per the BLS, “CPI sources data from consumers, while PCE sources from businesses. The scope effect is a result of the different types of expenditures CPI and PCE track…CPI only tracks out-of-pocket consumer medical expenditures, but PCE also tracks expenditures made for consumers, thus including employer contributions. The implications of these differences are considerable.”
On Wall Street Touts Emerging-Market Rates as Dovish Pivot Arrives
Paul Greer, a money manager at Fidelity
“Emerging-market central banks have got on top of rising inflation expectations a lot quicker than their developed-market peers and are now reaping the benefits”
Aninda Mitra, Head of Asia Macro and Investment Strategy at BNY Mellon Investment Management
“Many emerging markets were far more aggressive with policy rate hikes, never believed inflation was ‘transitory,’ and now provide investors with a substantial real-yield buffer”
Neil Shearing, group chief economist at Capital Economics
“Whereas policymakers in advanced economies have come under fire during this inflation shock, those in EMs have emerged with their credibility intact”
On preparing for ‘harder landing’ for global economy – PIMCO CIO Daniel Ivascyn
“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks… The market is “too confident in the quality of central bank decisions”
On Global Funds Have Another Window to Buy Asia’s Favorite Bonds
Kong Dongrak, fixed-income strategist at Daeshin Securities
“It’s a good opportunity”. Rate cut expectations are likely to form soon after the BOK clearly ends its policy tightening cycle
Ahn Jae-kyun, a fixed-income analyst at Shinhan Investment
“Inflation is showing a clear trend of easing, and it’s likely to keep moderating, giving no reason for the BOK to hike”
On Dizzying Bond Moves Put 4% Yield in Play to Win Over Investors
Zachary Griffiths, senior fixed-income strategist at CreditSights
The 4% level for 10-year yields “will bring in a wave of demand” from investors
Dominic Konstam, head of macro strategy at Mizuho Securities
“he market is very focused on the labor markets as the thing that needs to break weaker to finally get the Fed to be truly done for the cycle”