#US10Y Yield and #Dollar fall as #Fed Hike Looms
It is almost a sure bet that the Federal Reserve will hike an additional 25 bps during this month's FOMC meeting, but yields aren't playing ball. Despite another notch up on the Fed funds, the dollar continues to unwind a large speculative position that had built up post-election.
Pointed out in mid-April, the DXY - then over 100 - wasn't positioned for several key disappointments:
--- US macro data remains lackluster as the huge gap between soft/hard data begins to close (i.e. expectations were too high to begin with)
--- Inflation expectations, which MacroView correctly predicted, stagnated in by the New Year and rollover shortly thereafter. Commodities began to slump, especially crude oil.
--- Geopolitical risk is finally being realized from Brexit to terrorism. U.S. treasuries came into 2017 heavily discounted and have provided key opportunities.
--- President Trump has been unable to push through his key legislation that markets expected would aid U.S. growth.
--- The Federal Reserve is tightening into an economic slowdown, many see 1930s deja vu.
Traders have continued to unwind their massive eurodollar bets, and the 10-year yield has followed in lockstep:
Gold has broken a very important downtrend resistance that begin July 2016. This is important because this is when interest rates began its parabolic move into the December 2016 rate hike. This could be unwinding.
This said, 10-year yield is down almost 19 percent since the Fed hiked in March, and the z-score is moderately negative. We do not disagree that yield could bump up to 220-25 bps, but it's unlikely that an inflection will occur.
Unless both inflation and growth pick-up, expect the 10-year to drop below 200 bps by August.
Pointed out in mid-April, the DXY - then over 100 - wasn't positioned for several key disappointments:
--- US macro data remains lackluster as the huge gap between soft/hard data begins to close (i.e. expectations were too high to begin with)
--- Inflation expectations, which MacroView correctly predicted, stagnated in by the New Year and rollover shortly thereafter. Commodities began to slump, especially crude oil.
--- Geopolitical risk is finally being realized from Brexit to terrorism. U.S. treasuries came into 2017 heavily discounted and have provided key opportunities.
--- President Trump has been unable to push through his key legislation that markets expected would aid U.S. growth.
--- The Federal Reserve is tightening into an economic slowdown, many see 1930s deja vu.
Traders have continued to unwind their massive eurodollar bets, and the 10-year yield has followed in lockstep:
Gold has broken a very important downtrend resistance that begin July 2016. This is important because this is when interest rates began its parabolic move into the December 2016 rate hike. This could be unwinding.
This said, 10-year yield is down almost 19 percent since the Fed hiked in March, and the z-score is moderately negative. We do not disagree that yield could bump up to 220-25 bps, but it's unlikely that an inflection will occur.
Unless both inflation and growth pick-up, expect the 10-year to drop below 200 bps by August.