The US Treasury 10Y yield climbed again by 7.9 bps to 4.67% overnight. Apart from ADP employment increasing to 42.3k from 33k for the May 2 week, US President Donald Trump said that he would let newly confirmed Fed Chair Kevin Warsh do what he wants on interest rates. Concurrently, a newly released Reuters poll revealed that a near-85% majority of economists now expect the Fed to hold rates steady at 3.50 to 3.75% for the remainder of the year, marking a sharp reversal from March when a near-70% majority anticipated at least one rate cut. Most respondents in the survey maintained that the higher supply-side inflation stemming from the ongoing Iran conflict would ultimately prove transitory. On Wall Street, the S&P 500 Index fell for a third consecutive session, dropping 0.7% to close at 7353.61, which places the benchmark index 2.2% below its record high of 7501.24 reached last Thursday as investors worry that elevated pump prices will act as a tax on consumers.
Despite the US Treasury 10Y bond yield rising above 4.50%, the level from which the Fed Funds Rate fell from last September, the USD Index (DXY) has remained locked in its 96-100 range set after its post-Liberation Day sell-off. The initial shock of the Iran conflict appears to be fading, as sudden market volatility triggered by single headlines or social media posts gives way to deeper, structural stagflation concerns driven by an elusive peace resolution and the ongoing bottlenecks in the Strait of Hormuz. More attention is paid to US consumer psychology. In 2022, corporate balance sheets and households had massive buffers of pandemic-era excess savings. In 2026, those buffers are mostly gone, with consumers starting from a point of exhaustion from high energy prices, which act as an immediate regressive tax on consumption.
Since Trump’s victory in the US Presidential election in November 2024, the DXY’s inability to move with bond yields reflects deep structural shifts in the market’s perception of Trump 2.0’s macroeconomic policy. Apart from wide fiscal deficit concerns overpowering the yield appeal of US bonds, the greenback was also weighed down by Trump’s direct executive pressure on the Fed to lower interest rates and the weaponization of America’s currency policy.
Quote of the Day
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Alan Greenspan
May 20 in history
Portuguese explorer Vasco da Gama arrived in Calicut, India, becoming the first European to reach India by sea in 1498.
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