The 5% question

0:00Today, the global bond cell of pushes the US cost of borrowing ever closer to 5%. Plus, the odds of a Fed rate hike next week could all come down to one inflation number. And Oracle gives investors some confidence its AI investments are generating returns. This is Reuters Morning Beds bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Peter Devon in London. And I'm Elena Cassas. This Friday, September 11th. So Peter, the global cell offing government bonds, continues to gather pace this morning. The yield on the US 10 year reached 4.97%. Now if it gets to 5%, that's considered a crucial threshold by Wall Street. It's the point at which we might also see it drive an equity cell off as bonds become more and more attractive compared to stocks. Now this is a global trend, isn't it? But the US probably didn't improve investor confidence in its debt when President Trump said this week he'd give everyone $5,000. That's about 1.3 trillion of extra borrowing.

1:01But what's driving this is a global trend, isn't it? It was definitely a worrying time from bond markets to right now. And as you said, yes, promising $1.3 trillion to give Americans $5,000 for your vote is probably not the smartest thing to do right now. I'm not saying the President Trump's promises caused this bond sell off, but I don't think it's helping really is it. But as you said, 5% inching ever closer. And it seems almost inevitable at this point. But let's see, why is this such a magic number? Why is everyone watching it so closely? It is a bit of alarmist, isn't it? It would push us into a market meltdown. It hasn't happened since 2023 before that 2007. So maybe yes, a bit alarmist, but I think it is posing the risk of maybe a bit of sustainability about the US debt picture as well at Wall Street, as you said. It's interesting that Treasury Secretary Scott presents debt into trying to stop this this week with unusual intervention. He launched $6 billion of bond buybacks. Now he'd promised earlier in August that there would be at least $4 trillion. It seemed like the market was expecting more because they had a fairly lackluster response

2:01to that intervention, didn't they? All the sense said yesterday as well that the market isn't good shape and dismissing any concerns after that small than expected buyback. But I mean, once again, time and time we see percent, almost warning investors that he's going to burn them. I mean, he said earlier this week that I am the host now. I think he's talking about challenging traders to bet against his intervention to prop up the yen. This goes towards the bond market as well. And I think maybe traders are willing to set sits at the Basin Casino here. They're saying, we're maybe calling his bluff, when and if he's going to step in again to prop up the bond market. Yes, you could say he might even be increasing investors by reacting in this way because we don't usually see this kind of intervention from the US government. It's more what you might expect from emerging market currencies when governments start trying to prop up their currency. So it doesn't really seem to be working in terms of gaining investor confidence. Of course, the bond market is doing some of the Fed's work for it as it tightens conditions, of course, but all eyes will soon be on the Fed's decision for next week. Now, all of that could come down to one inflation number out later today, couldn't it? It's CPI for all because that's not normally even the Fed's preferred measure of inflation.

3:05Normally, they're focused on the PCE. But this number has started to look crucial for this week, hasn't it? Well, this is probably the most important, most critically watched inflation reports since, well, the last one. And it all seems a bit puzzling that we're putting so much pressure and focus on just one number. And if we look at the PPI numbers yesterday, we saw them rising by the most in three months, renewed price pressures coming through from those persistently high energy numbers. And that's probably what we're going to see today. Expectations 0.4% on the month-to-month number rising from 0.1% last month. It's worth pointing out how unusual it is just a few days ahead of a Fed rate decision for the market, not to really know what they expect the Fed to do. This is Kevin Walsh's change of policy, of course. He doesn't like forward guidance. He doesn't like signaling to the market what's going to happen. But just a few days ago, the odds of that rate hike were seen at more or less 50-50. They are now up at over 70% after those higher inflation numbers. And as oil went through $100 a barrel this week and looked set to stay there at the end of the week for the first time in four months. But markets had really got used under the previous regime to knowing what the Fed's going to do.

4:06Now, all this focus on one data point is a consequence really of this low information environment that the Walsh is creating. And it could come down to as much as the third decimal place. Now, we're expecting 0.2% for core inflation months on months. If it comes in as high as 0.4, the market will see a rise next week as locked in. 0.3 could be on the fence. 0.521 rounded up to 0.3. Who knows, they could be really drilling into the fine print here. Well, exactly. And I don't think the debate is really going to be settled today. Is it Fed's wall or the one who threw the spotlight on this inflation print and said that he would back a hike in September if this inflation print comes in hot? And it is what constitutes hot is a 0.2%, 0.3%, 0.4%. And as you said, it's coming down to decimal points. It's going to be a lot to be it today. And all the world, President Trump keeps posting on trees social that he wants rates to come down. So the credibility question is also of course still in the game. Now, in corporate news overnight, we had some strong results for Oracle, didn't we? Oracle coming into this was seen as a big test for the market on its tolerance of AI spending.

5:07Oracle has been the most exposure risk to all the big AI players we've seen with the rampant spending. And if we look at Oracle, what it's stuck hit a record high at bite last year. And since then, it's lost by half of its market value. So a lot of attention on this. But it seems that that rampant, robust growth in its cloud businesses is completely overshadowed all those concerns. Seals rose about 121% and shares have shot up. So I think those concerns are just going to have to wait for another day. This is in the week where AI headlines focused on the risk of the technology could kill us all. At least it was good news in the AI sector for someone. When you need to build up your team to handle the growing chaos at work, use indeed sponsor jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsor job credit at indeed.com slash podcast. That's indeed.com slash podcast terms and conditions apply.

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