Yields Make a Break
The overall price action Thursday was an old-fashioned risk trade with yields, stocks and commodities moving higher together while low-yielding FX dropped. More recently, stocks have moved in the opposite direction of yields so we'll be watching carefully to see if this paradigm holds. Eventually, higher yields will spook stocks but probably not until 1.6-1.7% in 10-years, at the very least.
In terms of economic data, it continues to show ongoing signs of recovery, but at a slower pace. Initial jobless claims rose to 351K from 332K. The Markit services PMI fell to 54.4 from 55.1. It also showed further rises in prices pressures and that's a theme that will undoubtedly return, especially with the ongoing climb in energy prices and rents. There's no sign of any improvement in supply chain bottlenecks and a report from Flexport said 20% of all pacific cargo ships are anchored outside of ports – many in LA or Shanghai – waiting to unload.
At the same time, the market has clearly moved on from Evergrande so those fears are fading. We'll continue to watch China closely for signs of stimulus or a GDP-slowing push for 'common prosperity'.
The bond market now though is signaling a change of theme. The rise in 10-year yields breaks a quadruple top at 1.38% and it settled well above that at 1.426%.Friday's US calendar is light with only US new home sales, which are forecast at 700K, a slight dip from 708K.
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