US financial markets are sending conflicting signals ahead of the critical August inflation report, with equities and short-dated Treasuries gaining ground while rate derivatives price in a 73 percent likelihood of a quarter-point Federal Reserve hike at next week's meeting.
US stock futures climbed, pushing the Nasdaq 100 to a one-month high. Short-dated Treasuries outperformed as traders awaited the inflation data, with US 10-year Treasury yields down 2 basis points to 4.66 percent.
The initial market relief followed data showing US inflation cooling last month. However, the Producer Price Index release proved inconclusive on whether the Fed will hold or hike, leaving the question open for the coming Consumer Price Index report.
Stephen Coltman, head of macro at 21shares, said that WTI oil prices surging back above $100 and Treasury yields hitting new highs were raising stakes for investors ahead of the crucial CPI report. The energy rally was attributed to escalating tensions in the Middle East. President Donald Trump commented that the United States "totally" controls the Strait of Hormuz, a key oil transit route.
The Treasury Department executed a buyback of $5.19 billion from a target of $6 billion in long-dated Treasuries, an operation aimed at managing yield curves during the surge in energy prices. European government bonds extended gains in line with their US counterparts.
