DXY did not follow the US 10Y bond yield back to May 1 levels
Fed Beige Book mixed, US GDP and PCE deflator next.
Group Research - Econs, Philip Wee30 May 2024
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US bond yields rose again, sending stock markets lower and the USD higher. The Fed’s Beige Book reported slow progress on US inflation, taking the US Treasury 10Y yield higher by 6.2 bps to 4.61%. While economic activity increased, the performance was mixed across and within sectors. The cautiously optimistic outlook was accompanied by greater uncertainty and downside risks, sending the Dow, S&P 500, and Nasdaq Composite Indices lower by 1.1%, 0.7%, and 0.6%, respectively. Tight credit standards and high interest rates continued to constrain lending growth. Several Fed districts reported that wage growth was at or normalizing towards pre-pandemic historic averages, with employers experiencing more bargaining power than a year ago. The commercial real estate sector’s uncertain outlook was attributed to the uncertainties regarding the timing of Fed cuts and the outcome of the US presidential election. 

Although the US 10Y bond yield returned to the level at the last FOMC meeting, the DXY held below the 106.5 high on May 1. The US bond market is starting to pay attention to the sustainability of US fiscal finances, noting that the two US presidential candidates – incumbent Joe Biden and challenger Donald Trump – widened the budget deficits and increased the federal debt. Trump has pledged to extend his tax cuts that are due to expire at the end of 2025. On May 21, the Congressional Budget Office’s Long-Term Alternative Scenarios Report estimated that the federal debt held by the public could increase to 166% of GDP in 30 years from 99% in 2024, an unsustainable situation. In mid-April, the IMF noted that the “remarkably large fiscal slippages” in the US posed “significant risks” for the global economy. However, these are medium-term concerns best left for the second half of the year.

Meanwhile, the greenback is supported ahead of US data but let’s see if the DXY can close the month above 105. Following the surprise rise in the US Consumer Confidence Index, we are wary that today’s US GDP growth for 1Q24 could be revised up, bucking the consensus for a downward revision to an annualized 1.3% QoQ saar vs. its advance estimate of 1.6%. That said, tomorrow’s April PCE deflators should mirror the slower month-on-month prints in the CPI inflation report. Pay attention to today’s initial jobless claims, where another increase should keep expectations for next Friday’s nonfarm payrolls to hold below 200k for a second month. Lastly, the Fed is set to enter a blackout period next week before the FOMC meeting on June 11-12, where it will likely reduce the three rate cuts projected for this year in its dot plot.


Quote of the day
“Good decisions come from experience. Experience comes from making bad decisions.”
     Mark Twain

30 May in history
In 1938, Isidor Rabi and his team developed nuclear magnetic resonance, which later became crucial for medical imaging through MRI.






 

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


 

 
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