Fed funds

FX Daily: Bond bears give new energy to the dollar

A very soft 30-year Treasury auction and hawkish comments by Powell triggered a rebound in US yields and the dollar yesterday. Dynamics in the rates market will remain key while awaiting market-moving US data. In the UK, growth numbers in line with expectations, while in Norway, inflation surprised to the upside.

USD: Auction and Powell trigger dollar rebound

The dollar chased the spike in US yields yesterday following a big tailing in the 30-year Treasury auction and hawkish comments by Fed Chair Jerome Powell. Speaking at the IMF conference, Powell warned against reading too much into the softer inflation figures and cautioned that the inflation battle remains long, with another hike still possible. If we look at the Fed Funds future curve, it is clear that markets remain highly doubtful another hike will be delivered at all, but Powell’s remarks probably represent the culmination of a pushback against the recent dovish repric

Rates Spark: Easing Inflation, Firm Labour Market, and Market Expectations

Rates Spark: Easing Inflation, Firm Labour Market, and Market Expectations

ING Economics ING Economics 14.07.2023 08:57
Rates Spark: Don’t get carried away Easing US inflation remains the key theme of the week, and we'll see more of that today as trade price data remains negative. This theme is currently dominating the direction for rates – but economic resilience is also having an impact, upping the market discount for how low the funds rate can get. That in turn limits how far the 10yr yield can fall.   Falling inflation helping to bring rates down, but a firm labour market limits how far they can fall June data continues to produce some remarkable outcomes. Most of the activity readings have been good, while inflation readings have been subdued. Following on the heels of a taming in consumer price inflation, yesterday's producer price inflation report had more good news. For June, PPI was running at a very subdued 0.1% on the month and at around a tame 2.5% year-on-year. Market rates are really latching on to the deceleration in the inflation theme, especially with data coming in better than expected. With respect to activity data, the latest jobless claims fell to 237k, showing the labour market still holding up quite well. It's been clear in the past few days that the market has been more willing to believe in the lower inflation risk coming from realised falls in key readings than the higher inflation risk coming from the tightness of the labour market. Yesterday's 30yr bond auction tailed, just as the 10yr did, indicative of poor reception. But tailing into falling yields is no disgrace. In fact, there has been decent underlying demand. At the same time, note that the market has also priced in a much higher terminal rate for Fed funds when you look out a few years. That’s in the sub-4% area, but not that far below the 4% mark. If you take this, and then look at the 10yr yield at 3.8%, there is no glaring value in the latter. We think that’s a reason not to get too carried away with the downside for the yields story – at least not just yet, anyway. We’ve clearly moved back below 4%, but breaking down to prior lows at sub-3.5% is not entirely probable. The firm labour market data is acting to keep rate cut cycle terminal rates relatively high. That’s the important counter to the falling yields narrative coming from realised falls in inflation.   Fed pricing has shifted significantly lower with the CPI release   Calmer waters in the week ahead, with some exceptions Tomorrow, the Fed will enter into its blackout period ahead of the July meeting. In US data the highlights are retail sales and industrial production, which can shed more light on the resilience of the economy. At least for industrial data, the ISM manufacturing survey does not bode well. We will also see a slate of housing-related data. The greater focus is likely to be on European Central Bank (ECB) communication with one more week to go before the blackout period. Yesterday’s ECB minutes of the June meeting underscored the bank’s determination to extend the hiking cycle beyond its upcoming meeting. At the same time, there are signs that the discussion about how much more is actually needed was already picking up. Yesterday saw Governor of the Bank of Greece’s Yannis Stournaras even put a small question mark behind the July hike pointing to weaker data, but the September hike should not be taken as a given in his view. Relevant for Sterling rates will be next week’s UK CPI figures, which could be pivotal for the size of the next interest rate hike. For now, the Bank of England is still seen more likely than not to hike by 50bp in August, although terminal rate pricing which had seen rate expectations go up to 6.5% in the wake of the wage data has now eased back towards 6%.   Today's events and market view The 10Y US Treasury yield has now come off more than 30bp from its recent peak, which takes it well into to the trading range that held until late June. We'll also see US import prices and the University of Michigan consumer sentiment survey, which could feed the narrative of easing inflation, although we don't see these releases adding any kind of new spin to the narrative.  The only data to note for today in the eurozone is the trade balance for May.
FX Markets React to Rising US Rates: Implications and Outlook

FX Markets React to Rising US Rates: Implications and Outlook

ING Economics ING Economics 25.09.2023 11:07
FX Daily: Re-pricing for a world of higher US rates FX markets are settling down after a big week of central bank policy announcements. Perhaps the biggest story is that the world's 10-year benchmark borrowing rate is pressing at 4.50% – seemingly on the view that a new neutral rate for Fed Funds may be 4%, not 2.5%. Expect the dollar to hold gains as Europe braces for another soft run of PMI data.   USD: 4.50% on the US 10-year yield could pressure risk assets US interest rates continue to grind higher. Overnight, the US 10-year Treasury yield has edged up to 4.50% – the highest since 2007. Driving the move continues to be a re-assessment of the Fed's higher-for-longer policy. Looking out along the USD OIS curve, investors struggle to see short-term US rates (one month OIS) below the 4.00% area over the next 15 years. Our rates strategy team argues that it is fair to see a modest positively sloping yield curve over that period and the 10-year priced 50bp above this 4% low point. This grind higher in US yields – marking higher risk-free rates – creates headwinds for risk assets such as equities, credit and emerging markets. Indeed, even the AI-powered S&P 500 is having a bad month, though it is still up 12.8% year-to-date. This equity correction is supportive news for the dollar, where any move to cash will mostly end up in the liquid dollar that pays 5.30% overnight rates. For today, another bleak run of PMIs in Europe may well keep European currencies soft and the dollar bid. The US data calendar today sees the flash PMIs for September, where the composite PMI remains just above 50. This data has not been market-moving recently. More important was yesterday's release of the lowest weekly jobless claims since January which suggested there are very few signs of a robust US labour market turning.  Expect DXY to remain bid and there is a scenario where the dollar stays strong into mid-October, when large US corporates based in California need to pay their taxes.
EUR/USD Rejected at 1.1000: Anticipating Rangebound Trading and Assessing ECB Dovish Bets

US Dollar Rises as Bond Market Ignites: A Look at Dollar's Resurgence

ING Economics ING Economics 10.11.2023 10:03
FX Daily: Bond bears give new energy to the dollar A very soft 30-year Treasury auction and hawkish comments by Powell triggered a rebound in US yields and the dollar yesterday. Dynamics in the rates market will remain key while awaiting market-moving US data. In the UK, growth numbers in line with expectations, while in Norway, inflation surprised to the upside. USD: Auction and Powell trigger dollar rebound The dollar chased the spike in US yields yesterday following a big tailing in the 30-year Treasury auction and hawkish comments by Fed Chair Jerome Powell. Speaking at the IMF conference, Powell warned against reading too much into the softer inflation figures and cautioned that the inflation battle remains long, with another hike still possible. If we look at the Fed Funds future curve, it is clear that markets remain highly doubtful another hike will be delivered at all, but Powell’s remarks probably represent the culmination of a pushback against the recent dovish repricing. Remember that in last week’s FOMC announcement, the admission that financial conditions had tightened came with the caveat that the impact on the economy and inflation would have depended on how long rates would have been kept elevated. The hawkish rhetoric pushed by Powell suggests that the Fed still prefers higher Treasury yields doing the tightening rather than hiking again, and that is exactly what markets are interpreting. The soft auction for long-dated Treasuries also signals the post-NFP correction in rates may well have been overdone and could set a new floor for yields unless data point to a worsening US outlook. Today’s highlights in the US calendar are the University of Michigan surveys. Particular focus will be on the 1-year inflation gauge, which is expected to fall from 4.2% to 4.0%. On the Fed side, we’ll hear from Lorie Logan, Raphael Bostic and Mary Daly. Dynamics across the US yield curve will have a big say in whether the dollar can hold on to its new gains. Anyway, we had called for a recovery in DXY to 106.00 as the Fed would have likely pushed back against the dovish repricing. The rebound in yields should put a floor under the dollar, but we suspect some reassurances from the data side will be needed for another big jump in the greenback.

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