Bonds Break Out

USD eases off from Wednesday's broad rally, boosted by the best ISM non-manufacturing report in more than 20 years. But the story remains the bond market as yields around the world soar on rising inflation expectations. Stocks indices are in the red as rising yields threaten. USD was the best performer in Wednesday's trade but is now pulling lower as GBP and JPY are the 2 leading currencies in Thursday trading due to reports that Brexit talks are nearing a deal on the Irish border and risk-off boosting the yen. A new Index trade will be issued to subscribers after the London close. US factory orders and jobless claims are up next. Ahead of Friday's US and Canada jobs, FX traders watch the EURUSD weekly close at 1.15, while gold attempts to retest its 55-DMA at 1202. If you're in Paris next week, join Ashraf for the Traders' Event in Paris with XTB.

The break down in bonds and corresponding jump in yields has the makings of a watershed. US 10-year yields rose 12 basis points to the highest since 2011 at 3.23%. US 30-year yields also rose above the key 3.25% zone to hit 3.39%.

We wrote earlier this week about the Amazon wage hike and a tipping point on inflation. The bond market is now signaling something similar. Fed speakers this week (Kaplan and Harker) signaled no rush to raise rates but the market is beginning to think differently.

The combination of soaring bond yields and rising oil is a solid reflection of broadening global growth and liquidity. In the big picture, it's still early but if bond market participants think their returns are going to be diluted by inflation, or that short-term rise aggressively, then dislocations coudl ensue rapidly. If so, emerging markets could suffer accelerating outflows in what becomes a viscous circle of USD buying.

It's been a storm of challenging news for the Aussie lately as AUD/USD returns to the lows of the year. Some of that is broad US dollar strength but there are several headwinds. On the weekend, Chinese manufacturing PMIs were softer then the RBA decision didn't provide any encouragement. Yesterday August building permits were down 9.4% m/m after a 5.4% drop the month before. That was also far worse than +1.0% expected. If trade is weak, watch for a break of the September low of 0.7085 in what would be a fresh low since Feb 2016.