JGBs suffer at close after U.S. Treasuries dive on stronger-than-expected June CPI

The Japanese government bonds suffered at close on the last trading day of the week Friday tracking a retreat in the U.S. counterpart following a stronger-than-expected rise in the latter’s consumer price inflation (CPI) for the month of June, despite extreme dovish comments from Fed Chairman Jerome Powell, delivered earlier this week.

At close, the yield on the benchmark 10-year JGB note, which moves inversely to its price, jumped 2 basis points to -0.125 percent, the yield on the long-term 30-year surged 2-1/2 basis points to 0.380 percent and the yield on short-term 2-year improved to -0.180 percent.

Headline CPI rose 0.1 percent m/m (1.6 percent y/y), weighed down by falling gasoline prices, but core CPI accelerated to 0.3 percent m/m (2.1 percent y/y), lifted by apparel prices and firmer shelter prices. Powell opined that “the relationship between unemployment and inflation became weak”, and while the US economy is “in a very good place”, the Fed wants to “use our tools to keep it there”, OCBC Treasury Research reported.

He added that “we’re learning that the natural rate of unemployment is lower than we thought…so monetary policy hasn’t been as accommodative as we had thought”. Separately, Williams said that the central bank wants to “extend this expansion, and have monetary policy in the right place to do that”.

However, Bostic noted he was sceptical about the need for a rate cut as “I am not seeing the storm clouds generating a storm yet” and Barkin suggested it is “hard to make a case for steeping on the gas”. Our house view is that a 50bp rate cut at the July FOMC would be too much to stomach and a 25bp cut is the path of least resistance, the report added.

Meanwhile, the Nikkei 225 index closed tad up at 21,685.90.