Those Minutes & Bonds Versus Commodities

Falling yields continue to send a chill through commodity markets in a sign that inflation isn't coming. A risk off mood struck Tuesday as US traders retuned from a long weekend, with JPY leading and CAD lagging. The ISM services index missing estimates and fresh doubts about the efficacy of the Pfizer vaccine all helped to accelerate the decline in yields. The minutes from last month's eventful FOMC meetings are next. The charts below suggest 1.35% yields remain crucial. Will the minutes finally sway yields higher? See what we say below. Yesterday, the WhatsApp Broadcast Group had a long in USDJPY near 110.40 targetting 110.90.

US 30-year bond yields fell back below 2% on Tuesday and 10-year yields took out the post-Fed lows. Some in the bond market continue to point to a short squeeze but that's tougher to believe a second time.

It's summer and the puzzle pieces don't always fit but at face value the drop in yields and breakevens is a negative for a wide swath of trades. The backbone of the commodity and commodity FX trades is high growth, low rates and rising inflation. That the bond market is increasingly comfortable with returns well below the Fed target is troubling.

That was reflected in commodity FX Tuesday and most commodities, including the sharp reversal in oil.

We hate to bet against the bond market but economic data highlights why it's too early to cast aside inflationary narratives. A miss in the ISM services data at 60.1 vs 63.5 kicked off the flight to safety but the internals of the report told a different story. A shift to less-positive sentiment was about margin pressure, capacity constraints and inflation. The 'order backlog' component rose to 65.8 from 61.1 and imports to 58.2 from 50.4. Comments in the report also highlighted severe supply chain disruptions.

Ultimately, either commodities will have to fall further or rates turn back higher. At the moment, rates are winning but there are many chapters yet to be written.

One of them will be Wednesday when the Fed will release the minutes of the June FOMC meeting. Chances are the commentary in the report is less hawkish than the dots suggested. Powell indicated that policymakers didn't even discuss the dots. At the same time, market participants will be feverishly scanning the report for taper talk.