Bonds Beaten-Up, Japan CPI Next

Inflation fears flashed on Thursday in a move that sent global bond yields sharply higher. The US dollar was the top performer while the Australian dollar lagged. Japanese CPI is up next. A new tactical GBP trade has been issued in the Premium Insights after Thursday's beat in UK GDP and ahead of next week's key BoE inflation report.

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Global sovereign yields moved up 6 to 10 basis points on Thursday in a sign of a market that's growing uneasy. It was tough to see a single catalyst but the combination of central banks increasingly cautious about QE risks and small signs of higher inflation were factors.

It's important to keep in mind how vulnerable the bond market is. If yields move up 50 bps globally, it would undercut years of returns. If the move higher is because of inflation, it would undermine the central bank argument for QE as well in what could develop into a viscious circle.

Everyone in the bond market knows this and is playing a game of chicken. Eventually, there will be a rush to the exits and many episodes of jitters are likely in the interim.

In terms of ECB buying, Nowotny added some clarity. He said the December ECB decision will be about to what extent to prolong QE, not on whether or not to extend it. At minimum, the path forward will be a taper beginning in April.

In terms of economic data, the US dollar continued to defy weak reports. Core durable goods orders fell 1.2% in September compared to -0.1% expected. It's the first decline in three months.

That was the final major release before Friday's first reading on Q3 GDP. Estimates range from 1.3% to 3.6% with the Atlanta Fed tracker at 2.1%. Look for a big market reaction when the numbers hit but keep in mind that it's a series that's almost always revised in a big way.

Before that comes the Japan Sept CPI report at 2330 GMT. The consensus is for a 0.5% y/y drop in the national CPI and +0.1% y/y ex food and energy. It's a reminder that the BOJ hasn't defeated deflation, despite claims otherwise.

It's also a reminder that despite some bond market jitters, we are still a long ways from any kind of runaway inflation.