MNI US OPEN: Washington On Stagflation Watch

UK Inflation At 40-Yr High, But Within Expectations

UK CPI inflation edged higher in May, rising to 9.1% -- the highest level since 1982, according to the Office for National Statistics. The increase will not be a surprise to financial markets, as it is in line with analysts expectations -- although the monthly 0.7% increase was just above forecasts.

"Although at historically high levels, the annual inflation rate was little changed in May," ONS Chief Economist Grant Fitzner said, pointing to continued steep food price rises and the record high cost of petrol.

Core CPI, highlighted recently by the Bank of England as a particular concerned as it was outpacing most peer economies, slowed modestly to 5.9% from 6.2% in April. Factory gate inflation, the measures of input and output costs for UK industry, again rose to record highs, with May Input PPI rising 2.1% to 22.1% y/y.

The number will not be a surprise to the BOE who saw inflation ticking higher, but there is little respite for policymakers, who still see inflation rising to just above 11% early in Q4.

FIXED INCOME: Gilts still outperforming but Bunds playing catch up

• Gilts were the early outperformers in core FI space after inflation data which was marginally weaker than economists' expectations but led to a reassessment of market pricing, reducing the probability of 75bp hikes from the Bank of England. Lower oil prices have also led to core fixed income generally moving higher (yields lower) with 10y Bunds almost having caught up to the moves seen in gilts, but both outperforming US Treasuries.
• The focus will now begin to turn to Powell's semi-annual testimony where markets will be watching for any clues on the Fed's near-term plans (50bp, 75bp or 100bp in July?) and also on longer-term expectations and the probability of the Fed's policy inducing a recession.
• We will also hear from Fed's Barkin, Evans and Harker while Canadian CPI will be closely watched north of the border.
• TY1 futures are up 0-16 today at 116-09+ with 10y UST yields down -4.7bp at 3.231% and 2y yields down -4.7bp at 3.151%.
• Bund futures are up 1.13 today at 144.46 with 10y Bund yields down -9.2bp at 1.675% and Schatz yields down -6.6bp at 1.067%.
• Gilt futures are up 0.80 today at 111.58 with 10y yields down -10.2bp at 2.550% and 2y yields down -12.3bp at 2.175%.

FOREX: JPY Stages Solid Bounce, But Outlook Remains Fragile

• USD/JPY is retreating off this week's multi-decade cycle high, putting the rate back below the Y136.50 in what's likely to be only a brief respite. USDJPY broke to new cycle highs this week, with price clearing short-term resistance at 135.59, Jun 15 high. The break higher confirms a resumption of the primary uptrend and maintains the bullish price sequence of higher highs and higher lows.
• The greenback also trades well, with the USD benefiting from the general rolling over of equity prices after Tuesday's corrective bounce.
• A downleg in oil prices has undermined sentiment somewhat, with WTI and Brent futures off around 5% apiece as Biden is set to call on Congress to suspend the Federal fuel tax in an effort to help with record high oil prices. Commodity-tied currencies are suitably lower, with AUD and NZD among the poorest performers Wednesday.
• Oil weakness is dragging on European oil & gas names, while the likes of ExxonMobil and Chevron are trading markedly lower pre-market. This puts US futures on track for a lower open of 1.5-2.0% later today.
• Canadian CPI data for May is the focus going forward, with the Y/Y rate seen accelerating to 7.3% from 6.8% previously. Eurozone consumer confidence data also crosses as well as speeches from Fed's Powell - delivering his semi-annual testimony, Barkin, Evans and Harker.

EQUITIES: Tuesday's Gains Swiftly Retreat

• Asian markets closed weaker: Japan's NIKKEI closed down 96.76 pts or -0.37% at 26149.55 and the TOPIX ended 3.55 pts lower or -0.19% at 1852.65. China's SHANGHAI closed down 39.517 pts or -1.2% at 3267.202 and the HANG SENG ended 551.25 pts lower or -2.56% at 21008.34.
• European stocks are down sharply, with the German Dax down 269.73 pts or -2.03% at 13033.41, FTSE 100 down 91.81 pts or -1.28% at 7060.73, CAC 40 down 109.5 pts or -1.84% at 5857.06 and Euro Stoxx 50 down 67.54 pts or -1.93% at 3428.96.
• U.S. equities are retracing Monday's gains, with the Dow Jones mini down 406 pts or -1.33% at 30119, S&P 500 mini down 58.75 pts or -1.56% at 3709, NASDAQ mini down 204.5 pts or -1.77% at 11372.75.

COMMODITIES: Lower Across The Board On Recession Fears

• WTI Crude down $5.09 or -4.65% at $104.49
• Natural Gas down $0.14 or -2.07% at $6.668
• Gold spot down $6.36 or -0.35% at $1825.92
• Copper down $13.45 or -3.32% at $391.55
• Silver down $0.34 or -1.56% at $21.3244
• Platinum down $8.44 or -0.9% at $934.03