Mind the Yields

00:00:00: The S&P-Five Hundred printed a fresh record high yesterday as software jobs and US inflation data continue to ease.

00:00:07: the Federal Reserve rate hike expectations enhanced for short term yields lower.

00:00:12: But whatever this week's data says, inflation remains elevated in the

00:00:16: U.S.,

00:00:16: July's easing was helped by lower oil prices but renewed Middle East tensions threatened to revive price pressures again.

00:00:24: MIUI rising US debt levels, structurally rising long-term yields and increasingly attractive Japanese yields complicate the outlook for global borrowing costs.

00:00:33: And strong earnings.

00:00:34: AI investment and energy profits continue to support Wall Street.

00:00:37: but geopolitical risks shift in Japan's rate outlook and higher energy prices look like ticking bombs.

00:00:43: So welcome to Swissco daily market talk is Friday Fourteenth of August, I'm Ipekos Kardashian.

00:00:51: We will talk about the good The bad and ugly off to financial markets.

00:00:55: But before we do an as always please keep in mind that opinions are my own And this is not financial advice.

00:01:08: This show is brought you by Swiss quote.

00:01:10: So let's start with the good.

00:01:11: The S&P five hundred traded at a fresh record high yesterday as this week's US inflation data showed easing in July numbers.

00:01:20: on Wednesday, the consumer price index in the U.S printed a retreat and both CPI and core CPI figures to three point four and two-and-a half percent respectively while Thursdays producer price index In the West show that headline PPI fell sharply a year on the basis in July.

00:01:40: that's down from five and half percent printed a month earlier, and well below four point nine per cent penciled by analysts.

00:01:48: Core PPI is to four-point two per cent level as expected by analysts from four point seven per cent printed a months earlier.

00:01:56: Now numbers are good but I see issues with these numbers.

00:02:00: First they remain comfortably higher than the first official.

00:02:05: Now, no one knows if the Fed under its new governor Kevin Warsh will continue to look at traditional inflation metrics and determine where their rates in the US are going.

00:02:15: But at current levels U.S.

00:02:17: inflation remains too high for ignore and certainly not enough to hype interest rates.

00:02:22: Kevin Wash himself had expressed concerns about US inflation running persistently above targets since half a decade first press conference.

00:02:31: I know things may have changed since then, but the fact is that U.S.

00:02:35: inflation is running well above the first two percent official inflation target and to the easing in price pressures in July was clearly driven by a sharp retreat on Middle East hopes at that month, but since then the tensions flared up again pushing oil prices significantly higher.

00:02:53: As such this week's optimism regarding the fading inflation pressures looks somewhat disconnected from reality.

00:03:00: if there is a reason why we see market rallies because US inflation worries eased in July while Optimism could fade away quickly.

00:03:07: But happily thats not the only reason and will talk about it later.

00:03:11: but none of us.

00:03:12: The federal reserve rate high expectations for September are melting like snow on under the sun these days.

00:03:18: Last week, activity on funds futures was assessing more than sixty percent chance for a September rate hike.

00:03:25: remember?

00:03:25: Today after set of soft jobs and inflation figures from That probability stands at only thirty-two percent.

00:03:33: The US two year yield that captures the federal rate expectations actually eased twenty five basis points since its July peak and U.S.

00:03:41: dollar has come under fresh selling pressure, since the Federal Reserve's latest July monetary policy decision where the new chair came in watch turn from not willing to make forecasts on a crazy geopolitical environment which was fine and understandable too clouding function to inflation, which is less fine and less understandable of course.

00:04:03: Today we don't even know if the Fed's priorities to tame inflation or just make the market absorb lower interest rates as smoothly as it possibly can hoping.

00:04:22: confidence crisis obviously in US institutions including the U.S government and Fed on a deepening Middle East war, and fact that the u.s government will have to spend more exploding debt levels already before the war.

00:04:35: governments push for more spending and clouded policy while all these pressured longer end of the us yield curve higher in structural way and even with the robust AI led growth, robust government spending.

00:04:48: And US governments efforts to narrow the trade deficit which both are... supportive of the GDP, U.S.-debt-to-GDP ratio return to highest level since pandemic months and leather is having a serious impact on US long term borrowing costs.

00:05:05: No helping at all!

00:05:06: Sanae Takahichi, Japanese PM who's famous for her explicit preference for software interest rates & robust government spending to boost growth ,is facing an ugly reality that the interest rate in Japan must be lifted to ease the persistent selling pressure the Japanese yen, which in return is probably hurting the Japanese economy today more than how your interest rates would.

00:05:30: The latest news suggests here that Near-term rate hike from the Bank of Japan making a September or latest in October rate hike highly likely as reaction.

00:05:45: The Japanese ten year yield is pushing above the two point eighty five percent level today without however pulling the dollar yen lower.

00:05:52: and In terms of Japanese yields we are now more than a full percentage Point about levels investors thought would trigger a reverse carry trade.

00:06:00: It did not so far, but that remains a big scare.

00:06:04: A bit scared at more killing Japanese yields will at some point in time, potentially in the near future trigger a reverse carry trade in the end positions and pull the rug from under the feet of US sovereign bonds.

00:06:18: At worst possible times when the Fed is forced to cut interest rates or not.

00:06:24: As such, after a U.S.

00:06:25: ten-year bond sale printed the highest yield since two thousand seven earlier this week yesterday's thirty year auction drew the highest rate in twenty five years.

00:06:34: The yields came at more than five point.

00:06:36: twenty percent for the third of your paper say defect can't lower the bargain costs alone.

00:06:41: there are many external factors like geopolitical tensions cross border asset flowers and sovereign trends that impact borrowing costs.

00:06:50: but the good news for the Fed is it could eventually have a say on the yields by acting on the interest rates.

00:06:58: The problem is that, On soft US data, and that's the good news for the markets.

00:07:25: And the latter e-codes positive across to major U S and European indices also lifting the Asian indexes along with strong earnings.

00:07:33: of course mainstream may be grappling with rising price pressures but Wall Street is thriving today despite the Middle East war energy crisis as a result of it and trade frictions in fact this shot from Bloomberg shows today than their stock prices.

00:07:53: In reality, the war and energy crisis helped energy companies have a great, great quality.

00:07:58: then AI craze is also boosting revenue at big technologies cloudiness as we saw in earning season on their investment.

00:08:05: so Big Technologies massive investments has a massive positive impact on AI enablers and construction company.

00:08:13: So that means many-many companies out there are getting fair share of actual energy crises are investments, therefore not being invested scares investors more than a few downside corrections down the road.

00:08:26: On the geopolitical front The lack of progress in US-Iran talks this week and news that Iran is now shifting toward a more offensive stance well didn't necessarily trigger a proportional positive reaction In terms of oil prices.

00:08:41: U.S.

00:08:41: crypto near the eighty five dollar per barrel level earlier this week And it's coming lower since then progress.

00:08:50: The muted reaction this week is obviously good news, but the latter could also be a ticking bomb.

00:08:55: indeed we start seeing that the european stock six hundred indexes now feeling increasingly uncomfortable with the rebound that we see in energy prices and they could well enter a period of extra quotient as higher oil prices also increase the chances of European central bank action likely waiting on stock valuations near their all-time high levels.

00:09:15: so And thank you for joining me and all your beautiful and supportive comments.

00:09:23: I hope this episode of Market Talk has been helpful, so please do not hesitate to leave your comments, reactions or questions below as usual!

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00:09:53: So I will meet again next week And until then good day trading.

00:09:58: have a lovely

00:10:13: weekend!