Americas

Today’s headline following yesterday’s FOMC rate decision (no change) is some version of “Fed Moves Up Rate Hike Timeline”. But to be clear the FOMC policy statement indicates no change to the official rate or current stimulus measures until ‘labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.’ The media/markets have instead chosen to focus on the unofficial future rate projections of the 18 Fed members of the FOMC, presented in the form of a dot plot. Yesterday’s dot plot showed a substantial shift in rate hike sentiment with seven Fed members now anticipating a rate hike next year and 13 seeing higher rates in 2023. But at his post-announcement press briefing Fed Chairman Powell did all he could to discount the dot plot: ‘These are, of course, individual projections…’; ‘they’re not a committee forecast…’; the Fed ’did not actually have a discussion of whether liftoff is appropriate at any particular year…’; and that ‘dot plots are not a great forecaster of future rate moves…’ and ‘should be taken with a big, big grain of salt.’

So between the FOMC’s official policy statement and the unofficial dot plot, the Fed is able to communicate seemingly conflicting outlooks on rates. Presenting two views is a brilliant (or frustrating) way to stay firmly focused on the data now while simultaneously giving an unofficial nod to higher rates.

The dollar strengthened against all G10 and major pairs following the rate announcement and has added to those gains today. The dollars 2-day gains:

+2.27% vs. SEK

+2.26% vs. NOK

+2.25% vs. MXN

+1.93% vs. CHF

+1.65% vs. AUD

+1.61% vs. EUR & DKK

+1.56% vs. AUD

+1.24% vs. CAD

+1.03% vs. GBP

+0.21% vs. JPY

The 10-Year U.S. Treasury yield climbed to 1.578 yesterday (up from 1.493) but has settled back to 1.515 today. Global equities are mixed, and gold is lower by 2.09% to $1773.35.

Americas

Today is the FOMC’s second day of meetings and will culminate with the rate announcement at 2:00PM ET and followed by Fed Chairman Powell’s press briefing at 2:30PM. Will today be the day that the Fed shifts its focus from ‘transitory’ to ‘taper’? Readings on inflation since the last FOMC meeting have exceeded forecasts but Powell has stuck steadfastly to the premise that recent inflation is just the economy reopening (‘transitory’), and not a persistent year-over-year inflation. Markets recently signaled their buy-in to Powell’s view on inflation by largely ignoring last week’s higher-than-expected CPI report. This was a significant shift from previous market reaction to signs of inflation, which led to volatile trading and equity sell-offs. So will the Fed change tack now? Unlikely but always possible.

Currencies are quiet ahead of the FOMC announcement with the dollar mixed, higher vs. Skandi/European pairs and lower vs. commonwealth pairs. The dollar today: -0.32% vs. NZD, -0.31% vs. AUD, -0.18% vs. GBP, -0.18% vs. JPY, and -0.16% vs. CAD.  Dollar gains are +0.64% vs. NOK, +0.38% vs. SEK, +0.08% vs. CHF, +0.07% vs. DKK and EUR.

Equities are little changed, and Treasury prices are down (yields up).

Americas

Yesterday’s CPI data showed surging consumer inflation with the YoY CPI reading of 5.0% the highest level since late 2008. Rising inflation is no surprise, especially if you have recently been shopping for a new or used car (or really any vehicle) which have seen prices increase >17.0% over two months. All measures of CPI reported yesterday were higher than forecast.

Markets shrugged off the inflation data, now apparently agreeing with the Fed’s thesis that the recent spike in inflation is ‘transitory’ (temporary price increases as the economy reopens). Now convinced that any stimulus reduction (tapering) by the Fed is on hold, risk appetite has returned, and markets are surging. The S&P 500 closed at a new record high and the Nasdaq 100 is approaching all-time highs set in April. Treasury yields are lower, the 10-year yield below 1.4500% for the first time since March. And the Volatility Index touched 15.15, its lowest point since February of 2020 (pre-COVID).

The U.S. dollar index is higher by 0.51% today as inflows into equities and other U.S. assets fuels dollar buying. Dollar gains are widest against the commodity currencies: +1.06% vs. NZD, +0.84% vs. MXN, +0.79% vs. NOK, +0.78% vs. SEK, and +0.72% vs. AUD. 

Americas

The U.S. dollar index is lower today, trading at 90.000, near the midpoint of its 89.535-90.627 1-month range. Support at 90.000 was key at preventing further dollar weakness at the beginning of the year, eventually leading to a dollar rally culminating at 93.437 on March 31^st.

The dollar is primarily lower vs. the commodity currencies tied to oil production. Oil is higher by another 0.44% today and is +10.65% over three consecutive weeks. Today’s dollar: -0.27% vs. CAD, -0.25% vs. MXN & SEK, -0.23% vs. CHF, and -0.19% vs. NOK. The dollar is -0.20% vs. EUR, -0.12% vs. JPY, and -0.10% vs. AUD.

The economic data calendar is light today with MBA Mortgage Applications already reported -3.1% through June 4^th. Tomorrow’s CPI is the next major reading on inflation at the consumer level, estimated to be +0.4% for May.

USDMXN is trading at fresh 6-month lows with today’s decline. Next support is at the January low of 19.5370, well within reach from current market at 19.6400.

With equity markets approaching all-time highs again, the Volatility Index at a monthly low, and the 10-year Treasury below 1.5000%, it seems safe to say markets are not concerned about any imminent Fed ‘tapering’. 

Americas

The U.S. dollar index is on the move today, gaining 0.31% and moving away from support at 90.000. The dollar is back from the long holiday weekend, having changed only -0.0001% over the previous four trading days from Friday to Wednesday. That sounds like some kind of record that I will need to check into and report back on.

The dollar is universally higher with the primary gains vs. the commodity/emerging market currencies: +0.66% vs. NZD, +0.63% vs. AUD, +0.59% vs. NOK, +0.58% vs. ZAR, +0.47% vs. SEK, +0.42% vs. MXN, and +0.36% vs. CAD.

The dollar’s gains vs. the major pairs are more moderate: +0.42% vs. CHF & EUR, +0.35% vs. JPY, and +0.10% vs. GBP.

Today’s ADP Employment Change for May was reported +978k vs. the +650k estimate. The outsized improvement to labor conditions added momentum to the dollar’s gains. Initial Jobless Claims were in line with expectations, +385k vs. +387k estimate. Tomorrow’s Nonfarm Payrolls is the next key piece of employment data, estimated +661k.

** Fed Chairman Powell is scheduled to deliver a speech tomorrow at 7:00 a.m. ET.

U.S. Treasury yields are higher, taking their cue from today’s positive jobs data. The 10-year yield is 1.602% after dipping as low as 1.550% in late May. U.S. equity futures are flashing a lower open in today's trading.

Americas

Weekly Jobless Claims reported today for the week ending May 22 were 406K, beating the 425k estimate. This is the 4^th consecutive week of lower claims and is the best result since the outbreak of COVID-19. The long-term average for weekly claims is near 200k, and if the current pace continues, we may see claims in the 200k’s by early July.

Annualized GDP for Q1 was 6.4% vs. the 6.5% estimate but is well above the 12-month long-term average of 1.9%. And Q4 GDP increased by 4.3%. GDP figures will likely remain on the high side as the economy continues to reopen.

Personal Consumption increased at an annualized rate 11.30% for Q1, beating the 10.9% estimate. This is the Fed’s preferred statistic on gauging inflation and today’s report is starkly higher than historical norms. But despite the outperformance, the Fed will likely maintain its position that current measures of inflation are ‘transitory’.

The dollar has gained some ground following today’s data releases. The U.S dollar index just turned positive for the day at 90.065 (+0.03%).

U.S. dollar gains are +0.30% vs. JPY, +0.27% vs. CHF, +0.07% vs. EUR, and +0.06% vs. AUD. The Canadian dollar is +0.38% vs. the USD, leading all gains in the G10. GBP is +0.33%, and NZD +0.11%.

U.S Treasury yields are higher today, partly due to mounting evidence of increasing inflation, but also on speculation that President Biden’s budget for 2022 (to be announced on Friday) will top $6 trillion. That amount of new debt in the market would drive down treasury prices/increase yields. The 10-year yield, which closed yesterday at 1.5774% is higher by 0.034bps at 1.610%.

Americas

The dollar is higher today, recovering yesterday’s decline following comments from the Fed’s Vice Chair Richard Clarida. Clarida is the latest Federal Reserve official to reiterate the Fed’s view that recent signs of inflation are ‘transitory’ and that when the time comes to raise rates the Fed will be able to engineer a ‘soft landing’.

With Fed policy clearly on hold, global investors are turning attention to equities which are higher today. Renewed interest in U.S. equities is creating demand for the dollar, leading to today’s gains.

Thursday’s Personal Consumption Report is the next reading on inflation, and is the Fed’s most relied on metric for gauging consumer price trends.

Today’s U.S. dollar gains:

+0.34% vs. CAD

+0.18% vs. GBP

+0.17% vs. EUR

+0.15% vs. JPY

+0.09% vs. CHF

+0.03% vs. AUD

The dollar is lower vs. NZD (-0.80%), and the MXN (-0.13%).

Treasury yields are lower overnight, the benchmark 10-year yield currently at 1.555%

Americas

The U.S. dollar index has reached fresh multi-month lows today, trading to 89.535, its lowest point since Jan 7^th. Next support is at 89.200 and lower at 88.250. The dollar has declined in six of the last eight weeks, losing 3.58% over that time. With its steady decline (and occasional profit-taking rally mixed in) the dollar is now sitting near key support levels vs. several currencies. Just a little more weakness and we could see the dollar make a sharp break lower, spiking volatility as it tries to regain its footing.

The dollar’s results vs. the G10 currencies during May:

SEK -2.42%

GBP -2.30%

EUR & DKK -1.94%

CAD -1.93%

CHF -1.91%

NZD -1.08%

AUD -0.58%

JPY -0.27%

NOK -0.09%

Today’s date releases include New Home Sales for April (950k estimate) and Consumer Confidence (118.8 estimate).

Equities continue to rally from the mid-May lows. The S&P500 has rebounded 3.3% and the Nasdaq 100 has gained 4.92% since May 12^th. And the Volatility index (VIX) has declined 36% from the May 13^th high.

Treasury yields are in a holding pattern with the benchmark 10-year Treasury note hovering near 1.60. With the Fed’s often-repeated resolve to maintain stimulus at current levels and leave the policy rate unchanged, stocks continue to be the go-to asset.

Americas

Yesterday the dollar rallied after the Fed released its minutes from the April 27-28 policy meeting which revealed that some members favored beginning the ‘tapering’ discussion: "A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."

Granted it is a generic statement but was enough insight into the thinking of some Fed members to fan the fears of accelerated Fed policy action. Potentially higher rates lifted the dollar and weighed on equities.

The U.S. dollar index is lower today by 0.32%, reversing most of yesterday’s 0.49% gain. Support is at 89.700.

The dollar is lower vs. all G10 currencies with the primary losses against commodity currencies AUD (-0.63%), NZD (-0.57%), and CAD (-0.45%).

The dollar encountered additional selling pressure this morning following release of the Weekly Jobless Claims at 444k, slightly better than the 450k estimate. Last weeks claims were adjusted up to 478k. A flat labor market will stay the Fed’s hand on policy rate changes.