by Marc Chandler
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FX: The dollar traded mostly higher last week. I suspect more near-term gains, but I am less convinced than I was a week ago. Given the FOMC minutes and more recent commentary from Fed officials, I suspect the market is exaggerating the chances of two cuts this year. That had been my leaning too, but I think the recent resilience of the labor market and sticky inflation has shifted the views at the Fed. The futures market is pricing in a little more than a 37% chance of a second cut. That is down from 76% on May 17. There is room for further adjustment. The dollar traded above JPY157 for the first time since May 1. The market is likely to turn more cautious as JPY158 is approached. The euro peaked on May 16, slightly shy of $1.09. It fell to nearly $1.0810 last week. The daily momentum indicators are turning lower. A break of the $1.0785 area would lend credence to a top being in place. Sterling reached a two-month high near $1.2760 on a softer CPI report, which saw the market push out the expected first cut to November. Despite the softer May flash PMI and a large decline April retail sales (-.23%), sterling recovered almost back to the week’s high ahead of the weekend. Prime Minister Sunak called national election on July 4. The Tories are expected to lose handily after being office for around 14 years. The US dollar frayed support near CAD1.36 last week and recovered to almost CAD1.3750 before selling off before the weekend to slightly below CAD1.3660.
Rates: The US two-year yield bottomed in mid-May around 4.70%. It reached near 4.96% last week. The high for the year was set at the end of April near 5.05%. The US 10-year yield bottomed near 4.30% in mid-May and reached 4.50% last week to test the 20-day moving average. This month’s high was near 4.69%, and the high for the year was seen on April 25 near 4.74%. The US 2–10-year yield curve became more inverted last week. The 2-year yield is about 45 bp higher than the 10-year and that is the largest premium (most inversion) this year. Yields in Europe and Asia rose. The 10-year JGB yield rose above 1.0% for the first time in a dozen year. Japan’s 30-year yield rose to almost 2.2%. The last time it was seen was in 2011. Since the middle of April, the US 10-year premium over Germany has fallen from 218 bp to about 185 bp last week, a two-month low. The US two-year premium peaked in mid-April near 205 bp. It fell to about 183 bp in mid-May. Note that the market is pulling back from its aggressive outlook for the ECB. Earlier this month, the market had been hovering around discounting three ECB rate cuts this year. It as scaled back to two cuts and about a one-in-three chance of a third cut.
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Where We Stand
2024-04-12
I am on vacation, and then on a business trip that will interrupt the commentary until the weekly note on April 30. The May monthly analysis will be published the following week after the FOMC meeting and April employment report.
Week Ahead: Strong US Jobs Data Failed to Sustain Dollar Rally, Can the March CPI do Better?
2024-04-06
The March US employment data were stronger than expected and
lend support to the re-acceleration hypothesis and an extension of US
exceptionalism. In Q1 24, nonfarm payrolls rose by an average of 276k. It was
the strongest quarter in a year and compares with an average monthly job gain
of about 251k in 2023. The unemployment rate slipped as the household survey
jumped around 500k after falling in the previous two months. The workweek
increased, and the participation rate rose. Reasons to dismiss the employment
data are becoming thinner. The economy is still growing faster than what the
Fed regards as the long-term non-inflation pace (1.8%). The US two-year yield
rose 12 bp and approached the high for the year (4.75%), and the 10-year yield
set a new high (4.43%) and settled up 19 bp.
April 2024 Monthly
2024-03-30
The macroeconomic and
geopolitical developments have not changed substantially over the past month. The
resilience of the US economy allows the Federal Reserve to put more emphasis on
achieving price stability. While the market favors a June cut (66% vs. 80% at the end of February), it has
not been fully discounted for over a month. The biggest event in March may have been the
well-telegraphed exit from negative interest rate policy and Yield Curve
Control by the Bank of Japan. Yet, over the course of last month, Japan’s
two-year yield rose was virtually unchanged and the 10-year yield rose less than two basis points to 0.73%. For all practical purposes, the eurozone and UK
economies are stagnant, but the respective central banks also do not appear in
any hurry to begin easing monetary
Week Ahead: Enthusiasm for the Dollar Rekindled
2024-03-23
Last
week will be remembered for several things. First, the Bank of Japan lifted its
interest rate target for the first time in 17 years and formally ended its
Yield Curve Control and ceased buying ETFs. The yen sold off and the dollar
approach the 2022 and 2023 cap slightly below JPY152. Japanese officials have
used the language that has signaled heightened risk of intervention in the
past. Second, the Swiss National Bank became the first G10 central bank to cut
rates. Its low inflation and soft growth impulses provided a conducive
backdrop, and there may be some tactical advantage in cutting before others to
minimize the risk of the franc strengthening. Third, the PBOC relented and
allowed the dollar to rise above the CNY7.20 cap that has held it back this
year. The near-term risk may
Week Ahead: Central Banks
2024-03-16
There has been a dramatic adjustment to US rates. The
two-year yield was near 4.40% before the US employment report on March 8 and it
reached near 4.73% before the weekend. The 25 bp surge is the largest weekly increase
since last May. For the first time in four months, the Fed funds futures strip
is no longer has at least three rate cuts discounted. The interest rate
adjustment underpinned the dollar, which rose against all the G10 currencies
last week. Like
the US two-year yield, the 10-year yield also rose every day last week, and its 23 bp increase was the most since the last October. The Dollar Index’s 0.70% gain was the largest rise in eight weeks, and ended a three-week decline. Rising rates helped lift the greenback almost 1.4% against the Japanese yen, despite heightened
Week Ahead: Will Firm Headline US CPI and a Recovery in Retail Sales Help the Dollar Recover?
2024-03-09
When everything was said and done last week, the market did not change its mind. There was still a better than 90% chance that the Federal Reserve delivers its first rate cut in June. Fed Chair Powell told Congress that the central bank was not far from the level of confidence needed
to cut rates.
Week Ahead: China Returns and Flash PMI Featured after US Rate Adjustment was Extended
2024-02-17
The US January CPI and PPI came in stronger than expected and this extended the recovery in US interest rates. In turn that helped underpin the dollar. We do not think the data itself changes the Fed’s stance. At least seven Fed officials speaking in the coming days will test this hypothesis. There are still several key reports before the data dependent FOMC meets again in about four weeks.
Week Ahead: Too Early for Central Banks to Move, and Q4 GDP to Showcase US Economic Resilience (with the help of 6.5% budget deficit)
2024-01-20
The week ahead features the first estimate of US Q4 GDP, which will be
revised for the next couple of years, and policy meetings by the Bank of Japan,
the European Central Bank, the Bank of Canada, and Norges Bank, Norway’s
central bank. Although the market anticipates the beginning of an aggressive
easing cycle by several central banks, and an exit of the BOJ’s negative
interest rate policy, the start is not expected until later in the first half. Obviously,
this is an unusual business cycle, and while US growth is expected to have
slowed, it may have still grown above what the Fed regards as the long-run pace
consistent with price stability. The preliminary University of Michigan’s
January survey showed rising consumer confidence and easing of one-year
inflation expectations. The flash
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