Yields Stabilize on more Inflation Signs

The old adage about the market doing whatever hurts the most amount of people was true in bonds on Thursday as US bond yields plunged. Does Friday's stabilisation in yields and USDJPY signal the start of anew wave higher? The US week concluded with higher than expected rise in US housing starts and building permits, weaker than expected increase in consumer setiment from the University of Michigan and a higher than expected 3.7% (9-year high) from the survey's 1-year inflation outlook. The latter helped bond yields find some support above 1.54% before regaining the 1.58%. USD ended the week lower across the board, while NZD and GBP retreated late in the week. Below are 3 charts related to oil, each suggesting ongoing pressure, despite this week's USD descent. Oil is considered the next shoe to "rise" in the US dollar's selloff.  Tune in to next week's action as the pre-FOMC blackout period is filled up with more earnings.  

Short bonds was a consensus and crowded trade in April after the Fed endorsed higher yields. In theory, a series of strong economic data points on Thursday should have added to the momentum. Retail sales rose 9.8%, initial jobless claims tumbled to 576K compared to 700K expected. Both the Philly and Empire manufacturing surveys were strong with Empire prices paid at a 12-year high.

All of that should have driven yields higher but that's not what happened. Perhaps the bond bears – seeing the failure of a catalyst to cause a move – decided to bail.

US 30-year yield fell 10 bps to 2.25%, touching the 50-day average for the first time this year. There was talk of position squaring, a rethink on inflation and Japanese buying but it's all tough to square.

The rest of the market cheered falling yields. US equities surged to another record and commodities climbed with copper breaking the mid-March high.

The FX market was more skeptical with commodity currencies consolidating. The dollar generally held its ground. On net though, we're starting to see some breakouts in charts we've been watching closely for the past few weeks.