OnTheRadar: US CPI, BOE Rhetoric Supports US Yields, FX Mixed

--US Stocks See Record Closes

By Vicki Schmelzer

     NEW YORK (MNI) - A solid August CPI reading, showing a headline rise of

0.4%, prompted some to see improved odds of the Federal Reserve raising rates in

December, which underpinned U.S. Treasury yields Thursday. 

     In addition, comments by BOE Governor Mark Carney on the need to make "some

adjustment to interest rates in the coming months" if the economy evolves as

expected, served to support UK yields, which in turn gave other yields a lift.

See MNI Main Wire story at 1:17 p.m. ET for details. 

     Ten-year U.S. Treasury yields were last near 2.192%, after trading in a

2.185% to 2.216% range. Thursday's U.S. yield high is the highest since mid

August. 

     Ten-year U.S. yields were nearing their first topside hurdle - the 55-day

moving average, at 2.234%. Yields have been below their 55-day since mid-August.

     The Sept. 8 yield low near 2.016% was the lowest since Nov. 10, when yields

saw a wide range of 1.991% to 2.145% two-days after the U.S. election. Nov. 10

was the last time 10-year yields traded below 2.0%. 

     After a larger yield sell-off in June, U.S. yields subsequently recovered,

and 10-year yields rose to 2.396% July 7, the highest since mid-May. U.S. yields

topped out at 2.357% July 14 and more recently, yields peaked near 2.289% on

August 8 and August 4 before retreating.

     As background, U.S. Treasury yields posted highs near 2.421% on May 11,

which was the highest yield since March 31, when the 10-year yield peaked at

2.431%. These levels will be the next larger topside hurdles.

     On March 14, ahead of the Fed decision, 10-year U.S. yields topped out at

2.628%.

     As a reminder, 10-year U.S. yields rallied from lows near 1.720% Nov. 9,

the day after the U.S. election, to highs near 2.639% on Dec. 15, 2016, which

was the highest since the Sept. 19, 2014, peak near 2.655%.

     Ten-year German Bund yields closed near 0.413% Thursday, after trading in a

0.388% to 0.430% range. The earlier high was the highest since August 17, when

Bund yields peaked near 0.446%. 

     The low of 0.292% seen Sept. 8 was the lowest Bund yield since June 27,

when yields troughed at 0.238%. The June 14 low of 0.225% was the lowest since

April 20, when yields bottomed at 0.192%.

     The July 12 yield high of 0.619% was the highest since Jan. 4, 2016, when

Bund yields peaked at 0.627%, the 2016 high. The next level of resistance would

be 0.651%, the Dec. 30, 2015 high. 

     As background, Bund yields fell to a low near -0.161% Sept. 27, 2016,

versus the life-time low around -0.2059% seen July 6, 2016.

     Ten-year UK Gilt yields closed around 1.230%, on the high side of a 1.108%

to 1.233% range. 

     The Sept. 8 low of 0.951% was the lowest since June 15, when yields tested

lows near 0.938% and Thursday's highs the highest since August 3, when UK yields

hit 1.249%.

     The July 7 high Gilt yield of 1.338% was the highest since Feb. 6, when

yields peaked at 1.370%. The June 14 low of 0.923% was the lowest since Oct. 7,

when Gilt yields bottomed near 0.905%.

     On Jan. 26, 2017, 10-year UK yields saw highs near 1.530%, which was the

highest yield since Dec. 15, when yields hit 1.536%, the highest since May 5,

2016, when Gilt yields saw a high near 1.538%.

     UK yields rose sharply in response to the BOE statement. 

     "The 7-2 vote to stand pat was not surprise; What caught the market off

guard was the hawkish assessment that 'all policymakers' see as likely the

withdrawal of monetary stimulus in the 'coming months,'" said analysts at Brown

Brothers Harriman

     "It underscored this by noting that rates may need to rise more than what

the market was discounting," they said. 

     The BOE next meets November 2, with market players seeing increased odds of

a 25 basis point hike, BBH said. 

     Ten-year Japanese government bond yields closed around 0.030%. Last week,

JGB yields flirted with negative territory and tested the lowest yields since

mid November.

     JGB yields hit highs near 0.108% July 7, which prompted the Bank of Japan

to step in buying bonds, offering to buy 10-year JGBs in unlimited amounts at

0.11%. 

     Current low JGB yields compared to the Feb. 3 highs near 0.150%, which were

the highest since the BOJ introduced negative interest rate policy back on Jan.

29, 2016. 

     Because the yield rise was across the board, albeit in varying levels, the

dollar was closing mixed Thursday.

     The euro held near $1.1906 in late afternoon action, on the high side of a

$1.1838 to $1.1922 range. 

     The pair stalled earlier ahead of the August 31 lows near $1.1823, seen as

initial support. 

     Only last month, on August 17, the euro bottomed near $1.1662, the lowest

level since July 27, when the pair bottomed near $1.1650. As the dollar slipped

overall, the euro recovered. 

     The Sept. 8 high of $1.2092 was the highest euro level since Jan. 2, 2015,

when the pair topped out at $1.2108. The 2015 high was $1.2109, seen Jan. 1. A

few weeks earlier, the euro posted a high near $1.2570 on Dec. 16, 2014. 

     In other pairs, dollar-yen held near Y110.44, in the middle of a Y110.32 to

Y111.04 range. The earlier high was the highest since August 4, when the pair

peaked at Y111.05. The July 28 high near Y111.33 will be the next topside

hurdle.

     On Sept. 8, as U.S. Treasury yields were testing their lows and risk

aversion was high, dollar-yen bottomed at Y107.32, the lowest level since Nov.

14 2016, when the pair bottomed at Y106.51. 

     Cable, closing around $1.3399, on the high side of a $1.3155 to $1.3404

range, was the star FX performer on the day. 

     The earlier high was the highest since early September 2016, when the pair

peaked at $1.3445 Sept. 6 and $1.3441 Sept. 7. Sterling last closed above

$1.3500 on June 24 - the day after Brexit. 

     In commodities, spot gold held near $1,328.00 per ounce, after trading in a

$1,315.80 to $1,330.48 range. Support is seen at the psychological $1,300 mark

and the August 31 low is $1,298.46. 

     The $1,357.61 high, seen Sept. 8 at the peak of U.S. dollar sales and risk

aversion, was the highest since August 16, 2016, when the precious metal peaked

at $1,358.21. 

     Barring a larger gold pullback, there is still scope for gains toward the

2016 twin-peak highs of $1,375.28 and $1,375.34, seen July 6 and July 11

respectively. 

     The August 15-16 lows near $1,267-$1,268 will continue to act as larger

support.

     NYMEX October light sweet crude oil futures settled up $0.59 at $49.89 per

barrel, after trading in a $49.15 to $50.50 range. 

     Earlier the pair vaulted its 200-day moving average at $49.55 and took out

late July/early August peaks in the $50.22 to $50.43. West Texas Intermediate

last closed above the psychological $50 mark July 31 and the earlier WTI highs

were the highest since May. 

     Only August 31, WTI posted a low of $45.58, the lowest since July 24, when

the front contract posted a low of $45.40.

     As background, WTI topped out at $52.00 May 25, before the announcement of

a nine-month extension of OPEC/non-OPEC production cuts. The extension was

largely priced in and oil fell to $42.05 on June 21. 

     In its International Energy Outlook 2017 report earlier, the EIA said it

looked for total world energy consumption to rise from 575 quadrillion BTUs in

2015 to 736 BTUs in 2040, a 28% rise, with the bulk of the energy growth

expected in non-OECD countries.  

     "World use of petroleum and other liquid fuels grows from 95 million

barrels per day (b/d) in 2015 to 104 million b/d in 2030 and to 113 million b/d

in 2040," the EIA said regarding liquid fuel demand.

     "To satisfy the increase in world liquids demand in the IEO2017 Reference

case, petroleum and other liquid fuels  production increases by 16.1 million b/d

from 2015 to 2040," the report said. 

     In U.S. stocks, the S&P 500 closed down 0.11% at 2,495.62, after trading in

a 2,491.35 to 2,498.43 range. The S&P 500 posted a life-time high close of

2,498.37 Wednesday and the earlier high was a life-time intraday high.

     At Thursday's close, the S&P 500 was up 11.5% year-to-date. 

     Market players were also monitoring the Russell 2000 index, which often

leads larger stock swings.

     The Russell 2000 closed around 1,425, down from an earlier high of

1,427.924. 

     The index topped out at 1,428.745 Wednesday and stalled well below the

1,452.091 life-time high seen July 25. Last month, the index bottomed at

1,349.354 on August 18, the lowest level since April 17, when the Russell 2000

bottomed at 1,345.363.

     The Dow Jones Industrial Average posted a new intraday high of 22,212.11 as

well as a new life-time high close of 22,203.48. 

     The Nasdaq Composite closed at 6,429.08. The index peaked at 6,460.419

Wednesday, but failed to revisit the life-time intraday high of 6,460.841, seen

July 27. 

     On risk appetite, the CBOE's volatility index or VIX was last at 10.41, in

the middle of a 10.28 to 11.04 range. The index is below its 200-day moving

average, at 11.57. 

     The VIX high of 17.28, seen August 11, was the highest since Nov. 9, the

day after the U.S. election, when the VIX peaked at 21.48. The 2017 high was

23.01, seen Nov. 4 ahead of the election. 

     The July 26 low of 8.84 was a new life-time intraday VIX low (prior

life-time intraday low was 8.89, seen Dec. 27, 1993). 

     Looking ahead, the market will eye August retail sales data, due out

Friday. MNI's median estimate is 0.1% for headline retail sales and 0.5%

ex-autos. 

     --follow MNIEyeonFX on twitter.com --

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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