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Morning Update


Chinese CPI was reported at 1.8% annualized versus 2.2% in June and 1.7% expected. Chinese PPI fell 2.9% versus a 2.1% contraction in June and 2.5% expected. Chinese industrial production rose 9.2% in July, less than the previous rate of 9.8% and expectations of a 9.5% rise. Retail sales and fixed investment data was also reported below estimates.

Market data out of the US this morning included the balance of trade and jobless claims. The trade deficit shrank this morning on lower oil prices and a general decline in imports. Jobless claims came in at 361K versus 365K last week.

This week has been a relatively mild trading week for the market with the exception of bonds. The S&P 500’s ($SPX) range this week has been just 16.1 points so far and the index has demonstrated low relative volatility compared to previous weeks. However, bonds ($TLT) have been moving decisively downward, 2% off Monday’s open. We are seeing a steepening of the yield curve right now: short terms rates are depressed due to expectations of “exceptionally low” interest rates through 2014 while long-term rates are rising. Operation Twist, in which the Fed sells bonds with maturities of 3 years or less and buys bonds with maturities of 6 years or greater, will run through the end of the year and has the effect of flattening the yield curve. The fact that we are seeing the yield curve steepened despite operation twist means the market is already anticipating its end.

Some are already calling the end of the bull market in bonds, such as Elliot Management’s Paul Singer, who yesterday said “Long-term government debt of the US, UKL, Europe, and Japan probably will be the worst performing asset class over the next ten to twenty years. We make this recommendation to our friends: if you own such debt, sell it now. You’ve had a great ride, don’t press your luck. From here it is basically all risk with very little reward” (Zero Hedge).

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