Sean Callow, Research Analyst at Westpac, noted previously that US President Trump’s dismay that stock markets were selling off despite assorted good news on the US economy and suggests that he should be in a much better mood this week, with Wed’s 1.3% rise in the S&P 500 its 4th straight gain. Yet Wed’s price action might be the most puzzling of all, he further adds.
“The most common “explanation” for the first sharp equity decline this year (-2.1% on 2 Feb) was that it was in response to the pickup in wages in the Jan employment report. Average hourly earnings rose to 2.9%yr, the fastest pace since 2009. The 10 year T-note yield closed above 2.80% for the first time since Jan 2014.”
“This seemed to provide fuel for a substantial further step higher in yields along the curve, a traditional threat to equity valuations after nearly a decade of extremely low yields. Equities tumbled and the US dollar gained on improved yield differentials. This week there was intense market focus on Jan CPI. Again it was another upside surprise to reinforce the narrative that inflation is finally returning.”
“Yields duly rose again and sustained the rise. But after an initial pop higher, the US dollar finished the day down against all G10 currencies. This dismal price action is very hard to ignore. Near term it seems the pressure will remain on the US dollar despite higher interest rates.”
“It may be significant that the biggest US yield moves are not at the short end (+66bp priced in for Fed tightening this year) but the long end – treasuries with 10 and 30 year maturities. As the chart shows, the tax cut package in 2017 and the spending deal in 2018 will mean rapid accumulation of debt.”
“Loose fiscal policy in response to recession can be very supportive for USD (see e.g. Reagan’s first term). But when it threatens to stoke inflation and sets an unsustainable path, we can see why some investors would need the dollar to cheapen up to finance those deficits.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.