Inflation Data Will Be a Test

Fresh declines in US bond yields are boosting gold and silver ahead of another US CPI release due shortly. The grind higher in risk trades continues on Monday as US stocks hit fresh records. JPY and AUD are the only gainers vs USD, with GBP and CHF on te backfoot. A big challenge looms in the day ahead with June US CPI. DOW futures are the weakest performers as the descent in yieleds  weighs on financials and NASDAQ turns the other way. 

SEE YESTERDAY'S 10-YEAR YIELD CHART HERE as1.40% becomes the new ceiling.

Monday's price action offered more evidence that last week's test of nerves was passed. US equities started soft but soon gained momentum, in part due to rising yields. The 10-year auction yield was 0.3 bps below expectations and that briefly caused a ripple in rates and USD/JPY but it was soon brushed aside.

Commodities and commodity currencies showed some resilience as well with oil shrugging off earlier losses. Copper has quickly become a forgotten market but it's held steady at historically-high levels over the past month.

Looking ahead, there's the scope for considerable volatility following the release of the June US CPI report. It's expected to edge back to 4.9% from 5.0% y/y in May and whether or not it can get under a 5-handle will largely determine the kneejerk reaction.

Beyond that, the details of the report will be critical. The market has a good idea of what components of CPI will be shrugged off by the Fed – used autos, travel, durable goods – and which ones may not be: owners equivalent rent, some services.

It will be key to watch the bond market reaction. After the surprise jump in May CPI, yields on the long end of the curve fell. The implication is that higher rates now may force the Fed into a policy error and doom long-dated bonds to sub-2% returns. Conversely, we will be interested to see the market reaction to a lower-than-expected reading because if it provides cover for the Fed to be patient, it could mean higher yields.