Kabul Fills Jackson Hole
Markets were settled into a bit of a lull ahead of Powell's Jackson Hole speech. The main themes of equity strength and yen weakness continued Wednesday but with less urgency. A larger change was in the sovereign bond market where yields rose the most in weeks in the US and Germany.
There's no clear catalyst but we're reminded of the June/early-July drop in Treasury yields that left everyone scratching their heads. It later turned out that the bond market was dialed into what was coming with delta.
Is there a new signal brewing? It's far too early to say. US 10-year yields rose 4 basis points to 1.34%, which is only back to August 13 levels and far from 1.60% pre-delta.
The obvious catalyst for higher rates is the better sentiment on delta, but it could also be jitters about Powell hinting at a taper, genuine fears about inflation or economic optimism and rotation into equities.
Technically, there's reason to expect the move to extend. The double bottom at 1.12% in July/August hasn't been tested with lows near 1.23% last week despite the jitters. A climb above the August high of 1.38% would add to the case for higher rates and, by extension, higher USD/JPY. Nonetheless, US 10 yr yields must first cross above the 55-DMA of 1.34%.
In Asia-Pacific trading there was another hint from the Bank of Korea, who became the first developed market central bank in the pandemic era to hike rates, lifting them 25 bps to 0.75%. Economists were split on the move ahead of time but rising consumer debt, a hot housing market and elevated consumer prices caused them to pull the trigger. Officials had been signaling a rate hike since May but that was delayed by a July lockdown.Could that be a hint about what's coming from the Fed?
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