Daily Agenda: Treasury Yields Rise as Investors Brace for Hike

For the first time since the beginning of market turmoil spurred by the U.K. referendum in favor of leaving the European Union, derivatives markets in U.S. interest rates are implying a greater than 50 percent chance of a Federal Reserve rate hike in 2016. In televised comments yesterday, Federal Open Market Committee Vice Chair William Dudley indicated that the Federal Reserve is moving closer to a rate increase while stopping short of predicting the outcome of the September policy meeting. In the aftermath of Dudley’s remarks, ten-year Treasuries fell, pushing up yields 1.5 basis points to 1.575 percent, while five-year yields rose by 2.5 basis points and 30-year yields gained 1.5. Clearly, as summer nears its end, bond investors must decide how to shift allocations in the face of an increasingly likely Fed tightening. Later today, the FOMC will release the minutes of its July recent meeting, potentially providing greater insight into the likelihood of action next month.

Shake-up among Trump campaign staff. Multiple media sources reported today that Steve Bannon and Kellyanne Conway have taken the helm at the campaign for Republican presidential nominee Donald Trump in the roles of chief executive officer and campaign manager respectively. Bannon, a former Goldman Sachs banker and movie producer, is the chairman of Breitbart News, while Conway is an established GOP pollster. The move reduces the authority of the campaign’s chair, Paul Manafort, who retains that title, at a time when polls show Trump losing ground to Democratic candidate Hillary Clinton.

U.K. employment data reveals a resilient job market. Data released today by the U.K. Office for National Statistics indicates that the number of newly jobless fell in July, despite concerns among employers over Brexit. The number of new benefits seekers contracted by 8,600 for the month, versus consensus forecasts that called for an increase of nearly 10,000. Headline unemployment remained unchanged at an all-time low of 4.9 percent.

Yuan slips as the pace of outflows rise. Today the Hong Kong-quoted yuan declined by 0.14 percent versus the U.S. dollar while the domestic yuan fell by only 0.8 percent, a pullback after days of gains despite three consecutive daily reference rate hikes by the People’s Bank of China. Many currency analysts believe outflows have expanded in recent months as mainland investors and corporations remain concerned that the currency is fundamentally overvalued. Separately, the Ministry of Public Security issued a statement today that 450 people have been arrested year-to-date in a push to crack down on illegal capital flows outside the country.

Fuel hedging costs hit Cathay Pacific’s bottom line. First half financial results released by Cathay Pacific Airways were significantly weaker than consensus analyst estimates with an 82 percent decline in earnings versus the same period last year. In addition, the Hong Kong-based carrier booked significant losses on jet fuel hedges in the face of increasingly stiff competition from mainland China airlines. The company currently has more than $10 billion in orders for new aircraft as it seeks to defend the dominance of its fleet in its home market.

Oil declines as inventory levels remain high. In advance of today’s Energy Information Administration inventory report, crude-oil futures declined following an American Petroleum Institute issued yesterday which included a surprising rise in stockpiles of distillates. With a modest increase in U.S. rig counts and inventory levels that remain historically high, the hope of energy market bulls turns on possible production curbs resulting from next month’s informal Organization of Petroleum Exporting Countries summit.