The Overnight Report: Long-End Yields Rising

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US markets were bi-furcated overnight with Nasdaq lifting slightly, with the Dow Jones and S&P500 in profit taking mode.

ASX200 futures are indicating a weak start after the index hit a record high yesterday.

Good Morning,

Big US banks earnings reports, the June CPI print and Nvidia’s restarting exports of H20 GPUs to China carved up US indices like a butter knife.

The Dow Jones sold off in response to higher Treasury yields and the Nasdaq was led higher by the largest company, Nvidia.

Aussie shares hit fresh closing highs on Tuesday as stronger-than-expected China GDP lifted sentiment.

The ASX200 jumped 60pts or 0.7% to 8,630. Ten of 11 sectors rose. Gains were led by tech, health care stocks & banks.

Materials lagged, weighed down by iron ore miners.

NAB Markets Today Research extract

Headline US CPI rose by 0.3% MoM in June as expected, but up 2.7% YoY and up from 2.4% in May and 0.1% above the consensus.

Core CPI was 0.2% as expected with YoY up to 2.9% from 2.8% in line with expectations. Under the hood, prices of goods most exposed to tariffs showed very visible signs of impact. 

Prices of products most exposed to tariffs, such as household furnishings, rose by 1% after 0.3% in May, and for household appliances by 1.9 percent, up from 0.8 percent.

The clothing (apparel) index increased by 0.4% following a prolonged period of decline. Grocery prices lifted 0.3%. 

The significant offsets last months were in items like airfares and accommodation suffering both from reduced international tourist inflows and reduced discretionary spending by US consumers and new (and used) car prices (remember our reference last Friday to Japanese car makers having slashed prices of cars exported to the US).

Post the data, US analysts forecast we have seen so far are suggesting a core PCE deflator print later this month of above 0.3% but below 0.4%, though judgement will be reserved pending tonight’s PPI release (and note we are as/more interested in Thursday’s Import price index as a more timely leading indicator of tariff impacts).

Market reaction to the headline CPI numbers was to see knee jerk losses for the USD and lower US yields (2s down -4-5bps) but which were very quickly reversed, and then some, as the details were parsed and evidence of pass through of tariffs to some good sectors was revealed.

2-year yields in NY are ending 2 basis points above pre-release levels and up 5 basis points on the day, while 10-year yields have also risen 5 basis points. Fed pricing has been pared slightly, with -44bps of cuts by year end against -48bps pre-CPI.

Perhaps the most interesting Fed speak overnight was from Richmond Fed President Thomas Barkin. Responding to an audience question regarding the next Fed chair, Barkin said “I want to hope and trust that person is going to try to decide the best policy for the country”.

Barkin also pointed to episodes in the Fed’s history when the Federal Open Market Committee didn’t follow the recommendation of the chair. “It happens,” he said. “We’ll just have to see”.

Related, Treasury Secretary Bessent said Fed chair Powell should relinquish his Fed Board seat next May at the same time as he ceases to be Fed chair (his governor term runs until January 2028). 

Boston Fed President Susan Collins, meanwhile, speaking to the NABE in Washington said, “Continued overall solid economic conditions enable the Fed to take the time to carefully assess the wide range of incoming data, thus, in my view, an ‘actively patient’ approach to monetary policy remains appropriate at this time”.

On the trade tariff front, the only news overnight was President Trump saying he had reached a trade deal with Indonesia, imposing a 19% baseline tariff, below the threatened Liberation Day tariff of 32%.

Like the earlier Vietnam deal, Trump said “if there is any transshipment from a higher tariff country, then that tariff will be added on to the tariff that Indonesia is paying”. Expect more tariff letters of this ilk between now and August 1.

The extent to which this will crimp overall exports to the US from Asia, including suspected transhipments originating from China, remains to be seen, but what yesterday’s 2Q GDP and June industrial production activity readings showed is China is as yet showing no signs of tilting away from its export led growth model.

This has to be a concern re sustaining 1H growth momentum, such as it has been, into 2H and beyond, especially against the backdrop of ongoing housing market deflation as revealed in yesterday’s Jun house price data. For the record, GDP expanded by a slightly faster than expected 1.1% QoQ, seasonally adjusted in Q2 but down on 1Q’s 1.2%.

In the UK, the annual Mansion House addresses by UK Chancellor Rachel Reeves and BoE Governor Bailey are wrapping up, but within nothing of immediate interest for asset prices best we can see from parsing of the speeches.

Bailey’s main focus has been railing against trade wars, while Reeves is promising some relaxation of furnace sector ‘ring fence’ rules (including restrictions on bankers’ bonuses) which she hopes will spur increased mortgage lending.

US finance sector earnings from JPMorgan Chase, Wells Fargo, Citigroup, BoNY-Mellon, and Blackrock were a mixed bag, resulting in share price falls of -5-6% for Blackrock and Wells Fargo, -0.75% for JPM, a 3.7% gain for Citi and little change for Bank of New York Mellon.

The overall Financial sub-sector of the S&P500 is down -1.65%, the third worse performing sector after Materials (-2.1%) and Health Care (-1.9%).

The only winner is IT (up 1.27%) led by a 4% rise for Nvidia following the news during our day yesterday it would receive a license to sell its H20 AI chips to China (which US Commerce secretary Lutnick described as its fourth best chip). The overall S&P500 ended down -0.4% while the NASDAQ is up 0.2%.

In FX the USD is stronger across the board, the DXY index ending in NY +0.56%, led by a 0.8% rise for USD/JPY. AUD is down -0.5%, AUD/USD hit a low of 0.6508. 

Global bond market fears take the wheel: Stephen Innes, SPI Asset Management

Liquidity’s drying up in the world’s biggest bond markets, term premium is on the march, and yet everywhere I look, there’s barely a whiff of fiscal restraint. A crisis in a developed market used to be unthinkable. I no longer think that’s true.

We’ve had decades where emerging markets (EM) carried the stigma of fiscal fragilitydefaults, capital flight, IMF visits. Developed markets (DM) got a pass because they borrow in their own currency. But that free lunch is getting cold. Debts are ballooning, deficits aren’t narrowing, and the dollar’s role as the global ballast is quietly eroding. A developed-market fiscal flare-up isn’t just some doomsday scenario, it’s a tail risk that’s growing teeth.

What’s especially worrying is the deterioration in bond market liquidity, which has been sliding ever since the pandemic, even in the deepest markets. You see it in the UK and Japan especially, bid-ask spreads widening, yields gapping away from their modeled curves. It’s a subtle but telling signal: markets are losing faith in fiscal management. And when liquidity fades, feedback loops start to form.

If the bond market starts to push back, higher yields, weaker currency, vanishing buyers, it forces policymakers into corner-cutting measures that often do more harm than good. We’ve seen this movie before in EMs. Now the UK, France, and yes, even the U.S. are auditioning for supporting roles.

Foreign ownership is another fragility point. In places like the UK and France, overseas buyers hold a big chunk of the debt, but they’re tourists, not lifers. They can and will walk away. Add to that a shift in domestic ownership structures, like the UK pension funds stepping back, and it leaves the door wide open for disorderly price action.

Long-end yields have been rising, and it’s not about Fed hikes anymore, it’s term premium doing the heavy lifting. Investors want more compensation to hold duration when fiscal policy looks rudderless and inflation risk hangs in the air like humidity. Japan is the canary here: long-end JGBs are breaking loose as the BOJ’s footprint crowds out real price discovery.

Globally, almost three-quarters of EM and DM economies are running wider deficits today than they were pre-covid. Revenues haven’t recovered. Structural deficits have become a way of life. The U.S. is the standout: its fiscal deficit-to-tax revenue ratio is among the worst in the world, and it’s set to worsen with tax cuts on deck.

The real lit fuse is interest payments. This is what triggers fiscal doom loops. It’s not the total debt that kills you, it’s the compounding cost of servicing it at higher yields. The U.S., again, is a glaring outlier here. Its interest bill as a share of revenue is punching well above the EM average. That’s not sustainable.

No one can predict the exact trigger; a failed auction, a Fed misstep, or even a political gaffe could light the match. The UK’s gilt crisis showed just how fast confidence can evaporate. But the underlying kindling is everywhere: soaring debt loads, political gridlock, short-duration issuance, and zero appetite for belt-tightening.

The warning lights are flashing. If you’re not thinking about the unthinkable, you’re not prepared.

Corporate news in Australia

– oOh!media ((OML)) has lost Auckland Transport deal but remains upbeat on the NZ market.

-MLC has joined up with TAL and Challenger ((CGF)) to develop new flexible super products for retirees.

-JSW is finalising a negotiations to take a stake in Coronado Global Resources’ ((CRN)) Curragh coal mine.

-CC Capital’s $3.4bn bid for Insignia Financial ((IFL)) remains on track but delayed.

-BlueScope Steel ((BSL)) has the right of last offer for Whyalla Steelworks.

-Cromwell Property Group ((CMW)) is developing a $201m office building for a Commonwealth Government department.

-Hansen Technologies ((HSN)) has been highlighted as the next ASX de-listing target despite denials from the CEO.

On the calendar today:

-EZ May Trade Bal

-US June PPI, Industrial Prod’n

-AMPLITUDE ENERGY LIMITED ((AEL)) Qtrly Report

-AMPL Qtrly Report

-EVOLUTION MINING LIMITED ((EVN)) Qtrly report

-RIO TINTO LIMITED ((RIO)) Operational Update

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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