May 16, 2018

Markets Today: Treasury yields hit four-year high, US dollar reaches year’s peak

US ten-year treasuries were up eight basis points this morning, with the US dollar reaching a new high for the year so far.

Today’s podcast


  • USD roars higher overnight as bond yields move to higher levels beyond 3%
  • Gains made against all the majors; AUD back below 0.75; NZD below 0.69
  • Not an overnight data-driven move, nor stronger Fed rate signalling, but momentum and technically-driven

Whoa!  That was this scribe’s reaction to the renewed upward momentum in the USD breaking higher overnight, the Bloomberg spot dollar index up 0.61%, US 10y Treasury yields testing above 3.09% during the session just and still at 3.072% as we go to print.  It was not a stellar tax cut-driven US Retail Sales report for April, nor more aggressive rate hike views from Williams (both with in line with expectations/recent views), nor any overtly hawkish soundings from Fed Governor nominees Clarida and Bowman who were appearing before the Senate Banking Committee overnight with seemingly measured statements.

Perhaps it’s been a re-evaluation of the relative attractiveness of the US yield story (cf Europe, Japan, and elsewhere, including Aust/NZ) and momentum/technical-driven moves.  The move up in the US 10s came from a combination of broadly equal real and embodied inflation yield increases.  On the data, there was a slight undershoot from the first print of German Q1 GDP by a tenth, while US Retail Sales were in line but assisted marginally by 0.1-0.2% point upward revisions.  The Atlanta Fed upped its estimate of GDPNow but at the margin for Q2 to 4.1% from 4.0%.

It may well be that a lot of commentary about the USD having topped out over the last couple of days has caught some out on the move.  And whether this latest move up can be sustained is to be tested, but it’s to cleaner air.  We’ll see if it can garner extended fundamental US data support from here or soft data elsewhere. It was a move higher in the USD against the majors and emerging markets, even if the latter is exaggerated somewhat by idiosyncratic issues such as Turkey.

US Retail Sales in April rose 0.3% while the Sales “Control Group” that feeds into GDP rose 0.4%, both exactly in line with expectations.  Headline sales for March were revised up 0.2%, while Control sales by one tenth.  The Empire State manufacturing survey for May was 20.1 in May above the 15.8 expected.  The NAHB Housing Index remained strong at 70, up from 68.  German GDP for Q1 printed at 0.3%/2.3%, missing by a tenth, while UK ex-bonus average earnings were 2.9% in March, up from 2.8%, and line with expectations, and to be fair resilient as was the tenor of the wider UK labour market report, unemployment still at 4.2% and employment up smartly.  Along with the commodity currencies, the Euro took a hit, but German 10y bund yields still rose 3.4 bps.

The AUD sits at 0.7470/75 this morning, the NZD at 0.6860/65, the NZD off 0.7% notwithstanding a 1.9% rise in the overnight dairy auction prices.  Yesterday’s Chinese activity reports were mixed with stronger Industrial Production (7.0%) but misses in Retail Sales (only 9.4%!) and Investment; the AUD was initially unmoved yesterday after the Chinese data, though the RBA Minutes amplified the “no near term pressure for a RBA move” message.

The Fed’s John Williams has been speaking and has been speaking of 3-4 rate hikes for this year (2-3 more) as the right direction for policy, as “reasonably balanced”.  He also added that the recent inflation pick-up had been reassuring.  None of that would have been any surprise to Fed watchers.  He added that if the economy outperforms then it makes sense to hike faster for those looking for a hawkish tilt.

Dallas Fed President Kaplan acknowledged that the Fed was “basically achieving both of our dual mandate objectives” and so it should continue moving to towards ‘neutral’.  As the Fed continues hiking we should expect discussion to intensify around what the Fed thinks that ‘neutral’ rate is.  Williams said he thought the “new normal” for the neutral rate was around 2.5% (he added that he didn’t expect the fiscal stimulus to have any more than a 0.25% impact on neutral) while Kaplan put it in a range of 2.5-3%.

Appearing before the Senate Banking Committee for their Fed Governor confirmation hearings, both Richard Clarida and Michelle Bowman were measured and not presenting views from what you would expect from such well-credentialed nominees for these posts.  Clarida spoke of the importance of the dual employment/price stability mandate and the importance of the Fed’s independence.  He has had meetings with Trump and said in questioning from the Committee that he’s had no indication of anything to the contrary, nor was he asked by the President how he would vote on rates.  Bot appear safe/solid choices, Clarida being nominated for Governor and Vice Chair of the Federal Reserve Board, Bowman a Governor nomination.

Coming up

  • 50 Japanese GDP Q1 (L: 0.4% q/q, 1.6% saar; F: 0.0%/0.1%)
  • 30 AU Westpac Consumer Sentiment, May (L: 102.4/-0.6%; any post-Budget reaction?)
  • 30 AU Wage Price Index (WPI), Q1 (L: 0.6%/2.1%; F: 0.6/2.1%.  NAB’s estimate suggests modest downside risk from the WPI at 0.5-0.6%.  Watch also for private wages that have been lagging public sector wages, private wages having risen 0.5% for the past three quarters
  • 30 Chinese New Home Prices April (L: 0.42%)

Market prices

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