Biden's Possible Misstep and Rising Inflation Impact on Bond Yields and Black Gold

Biden's Remarks on Bombing Iran Oil Facilities

There are speculations that President Biden might have made another verbal error when he mentioned that they were "discussing" bombing Iran oil facilities. Regardless of the confusion, the oil market has reacted, with West Texas Intermediate (WTI) trading at one-month highs.

Increasing Pump Prices

As a result of the rising WTI, pump prices are also expected to go higher.

Impact on Services PMI and Inflation Data

While the Services PMI headline data was solid, it was marred by significant increases in underlying inflation data. This, combined with the surge in oil prices, led to a significant rise in bond yields on the day, with yields up 6-8bps across the curve.

Drop in Rate-Cut Expectations

There has also been a noticeable decrease in rate-cut expectations. The year 2024 is now evenly split between 2 and 3 more cuts, while 2025 remains at 4x25bps cuts.

USD Rises Amid Geopolitical Safe Haven Flows

The short-term interest rates' hawkish shift has helped the USD rise, alongside geopolitical safe haven flows.

US Equity Markets

US equity markets saw a decrease overnight, with futures dumping at the European open. There were some chaotic swings around the US cash open, but once Europe was closed, the selling pressure resumed. Small Caps were the laggard and S&P/Nasdaq were the least affected in today's market.

Volatility Around Tomorrow's Payrolls Print

There is expected to be significant action around tomorrow's payrolls print, but stocks are currently ignoring the risk.

Bonds at One Month Highs

Bonds are back at one month highs and stocks are slightly fading as the two asset classes begin to re-converge into tomorrow's jobs data.

Surge in BEs Due to Higher Oil Prices

There is a surge in breakeven inflation rates (BEs) due to the rise in oil prices, which is not what the Federal Reserve and its associates would like to see.

Gold and Bitcoin

Despite the strength of the dollar, gold is maintaining its gains. Bitcoin, on the other hand, remained essentially unchanged, finding support at $60,000 after the last couple of days' collapse.

US Macro Surprise Data

The US Macro Surprise data surged back into the positive today, reaching its highest in six months. This raises the question of whether an economy that required 50bps of rate-cuts and is priced for 75bps more bps this year really needs it.

USA Sovereign Risk

Meanwhile, USA sovereign risk continues to quietly increase. This could potentially be the ultimate hedge for a Harris victory.

Bottom Line

It's clear that the current geopolitical and economic climate is causing significant shifts in markets, from oil and bonds to the USD and equities. The question is, how will these shifts impact the broader economy and what will be the response of key players like the Federal Reserve? It's a complex scenario that requires careful observation and analysis. What are your thoughts on this? Feel free to share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, which takes place every day at 6pm.