Flattening Curve & Real Yields Hit USD

A broadening set of circumstances conspires on USD weakness--from rising real yields (10-yr breakevens hit fresh 5-month highs at 2.54% ad nominal 10s below 1.52%) to a flattening yield curve. Weaker than expected PPI and Wednesday's CPI-FOMC minutes interaction also weighed on the greenback. USD initially rose on signs of wage pressure in the CPI report but relented quickly afterwards and fell further on a strong bond auction. Wednesday's rise in 2-year yields and pullback in 10-year yields triggered chatter of flattening yield curve, implying the US economy cannot handle considerable tightening. The Premium long in DAX hit its final 15450 target for 300-pt gain and the FTSE100 (Mystery chart shown in yesterday's IMT) hit its final target for 130 pts for those who moved their stop. Below are the long calls in GBPJPY and XAUUSD based on the inverted H&S in gold.

US PPI rose 0.5% in September, posting the smallest increase of the year. US CPI was slightly firmer than expected at5.4% y/y compared to the 5.3% consensus but it was the real weekly earnings component that drew attention as it climbed 0.8% m/m compared to 0.2% previously. Initially, that led to a 20-30 pip rise in the US dollar but as the day wore on that faded. That extends a trend of choppiness this week.

Part of the reason for the decline was a surprisingly low yield in a sale of US 30-year bonds as the issue was 1.3 bps below what the market was expecting. With that, US 30s have fallen 13 basis points from Friday's high. It's no surprise that's dragged down the US dollar, at least in the short term.

The Fed minutes didn't inspire much in terms of price action, but did outline a Fed staff scenario of $15B monthly tapers starting in November or December. Both scenarios would take result in and end to the process in the middle of 2022, something Fed officials have flagged in comments.