• S&P 500 down 0.7%
  • WTI crude oil flat at $83.51
  • US 10-year yields up 10.4 bps to 4.70%
  • Gold down $5 to $1868
  • USD leads, AUD lags

The geopolitical premium in the bond market has quickly left as the situation remains contained to Israel-Palestine, at least so far. US yields pulled the US dollar higher and that intensified after a ghastly 30-year auction. Initially, equities shrugged at higher yields but eventually it was too much to take and stock markets sank.

USD/JPY is back to within striking distance of 150.00, so that will keep markets on edge in Tokyo trading and beyond. Elsewhere the dollar took back most of this week's losses in short order.

The CPI report is what kicked off the dollar buying as some of the core numbers remain stubbornly high. That said, Fed and rates market expectations were barely changed. Here is how the fixed income team at BMO saw the move in bonds:

The selloff in 10s was the most perplexing aspect of Thursday’s price action. First, it was almost entirely a real yield move as 10-year breakevens gained just 2 bp. Second, if investors believed inflation was running ‘too hot’ for this point in the cycle, one would have expected breakevens to widen more dramatically as the Fed’s battle with inflation, presumably, would need a longer runway before delivering results. Third, in the event the real economy is perceived as being sufficiently strong to weather sustainably higher policy rates, then we’d expect the bulk of the bearishness to be absorbed by the 2-year sector as it would afford the Fed more time to delay rate cuts in 2024 (or beyond).

The antipodeans were particularly hard hit on global growth worries. Australia and New Zealand are also particularly vulnerable to a higher-for-longer scenario due to high leverage in housing and many years of ZIRP policies.

FX news wrap