Dollar Gets Some Traction from Higher UST Yields

July 02, 2024
  • We are seeing a bear steepening of the UST curve; June ISM manufacturing PMI was soft; May JOLTS data will be the highlight today; June vehicle sales will also be important; Canada June PMIs start rolling out
  • Eurozone reported June CPI; ECB officials remain cautious; U.K. BRC shop price inflation continues to fall
  • RBA minutes were reported; NZIER Survey of Business Opinion for Q2 was soft; Korea reported soft June CPI

The dollar is getting some traction from higher yields. DXY is trading higher near 106 and remains on track to test the April-May highs near 106.50. The euro is trading lower near $1.0715 as the relief rally fades, while sterling is trading lower near $1.2635. USD/JPY traded at a new high for this move near 161.75 today as the market continues to test the BOJ, but we see no imminent intervention risks. Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed remains in hawkish mode. At the same time, weaker data in many of the major economies underscore the widening economic and monetary policy divergences that should continue to support the dollar.


We are seeing a bear steepening of the UST curve. Market chatter suggests that rising odds of a Trump win are a major factor. This is due to concerns that likely fiscal stimulus risks fueling inflation, which in turn would keep the Fed from cutting rates as much as the market now expects. In addition, larger fiscal deficits would lead to greater UST issuance, especially at the long end. Higher UST yields are boosting the dollar and follows the textbook impact on a currency of loose fiscal and tight monetary policy. The market sees 70% odds of a September cut, but it will of course depend on the data. Powell speaks today.

Growth remains solid. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 1.7% SAAR, down from 2.2% previously. Next update comes tomorrow. Elsewhere, the New York Fed’s Nowcast model is tracking 1.9% SAAR for Q2 and 2.2% SAAR for Q3. Next update is Friday.

June ISM manufacturing PMI was soft. Headline came in at 48.5 vs. 49.1 expected and 48.7 in May. The details were mostly weaker as employment came in at 49.3 vs. 51.1 in May and production came in at 48.5 vs. 50.2 in May. The one bright spot was that new orders came in at 49.3 vs. 45.4 in May. Supplier deliveries rose to 49.8 vs. 48.9 in May, while the backlog of orders fell to 41.7 vs. 42.4 in May. The lower these readings are, the less stress there is in supply chains. These two did not move very much in June and suggests that the drop in prices paid to 52.1 vs. 57.0 in May was due more to easing demand than to easing supply constraints. ISM services PMI will be reported tomorrow, and headline is expected at 52.6 vs. 53.8 in May.

May JOLTS data will be the highlight today. Job openings are expected at 7.950 mln vs. 8.059 mln in April. If so, this would be the lowest since February 2021. Labor demand is clearly cooling, with the number of job openings relative to unemployed workers down near its pre-pandemic level. Moreover, the job openings rate (job openings as a percentage of total employment plus job openings) fell in April to 4.8%, the lowest level since December 2020 and nearing the 4.5% threshold consistent with a significant increase in the unemployment rate. June Challenger jobs cuts will be reported tomorrow.

June vehicle sales will also be important. Sales are expected at an annual pace of 15.8 mln vs. 15.9 mln in May, which was the strongest since May 2021. This data will be the first clue for June consumption ahead of the retail sales data July 16.

Canada June PMI start rolling out. S&P Global manufacturing PMI will be reported today. Its services and composite PMIs will be reported Thursday. Ivey PMI will be reported Friday. Softness in the economy should keep the BOC on its easing path, with the next cut likely to come in September.


Eurozone reported June CPI. Headline fell a tick as expected to 2.5% y/y while core came in a tick higher than expected and remained steady at 2.9% y/y. Services inflation remained steady at 4.1% y/y. Yesterday, Germany reported its EU Harmonised inflation fell three ticks as expected to 2.5% y/y. Overall, the eurozone disinflationary process is still on track and supports the case for the ECB to cut rates again in September, where the market currently sees 70% odds.

ECB officials remain cautious. Lagarde said “We are still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks. It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.” Lane said “The June inflation data, we still have questions on services inflation. These data do not settle that.” Muller said “If the actual outcome ends up being close to our latest projections, then we most likely can further reduce the level of policy restrictiveness this year. When exactly and how much remains to be seen.” Guindos said, “For the rest and given the uncertainty we’re going through, it’s quite clear we don’t have a predetermined path” and added “we have to be very prudent.” Elderson, Schnabel, and Lagarde also speak today.

U.K. BRC shop price inflation continues to fall. Shop prices fell -0.2% m/m in June on lower food and non-food items. On a y/y basis, shop price inflation slowed more than expected to a 32-month low of 0.2% vs. 0.5% expected and 0.6% in May. This raises downside risks for the June CPI data on July 17. Bottom line: the disinflationary trajectory supports the case for a Bank of England rate cut in August, which can further undermine GBP. The market sees 60% odds of a cut then, which seems too low.


RBA minutes were reported. At the June 18 meeting, the bank delivered a hawkish hold. Minutes showed that the major reason RBA members thought the case to leave the policy rate unchanged was stronger than a hike was because of the “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress.” As such, tomorrow’s May retail sales print will either strengthen or weaken the case for a rate hike. The swaps market is pricing 25% odds of a 25 bp RBA policy rate increase at the next meeting August 6, rising to 35% September 24 and over 50% November 5.

The NZIER Survey of Business Opinion for Q2 points to a continued slowing in the economy over the coming year. A net 35% of firms expect a deterioration in the general economic outlook over the coming months on a seasonally adjusted basis vs. 25% in Q1. Furthermore, a net 25% of firms fired workers in Q2, the most since the GFC, and a net 10% expect to fire workers in Q3. Lastly, a net 23% of firms raised prices in Q2 vs. 35% in Q1, and a net 23% also expect to raise prices in Q3, the lowest since 2021. This reinforces the case for the RBNZ to start easing earlier than they currently project, which can further weigh on NZD. The RBNZ has the first rate cut penciled in for Q3 2025. In contrast, the swaps market has a November cut more than fully priced in.

Korea reported soft June CPI. Headline fell two ticks more than expected to 2.4% y/y vs. 2.7% in May, while core remained steady as expected at 2.2% y/y. Headline was the lowest since July 2023 and nearing the 2% target. At the last meeting May 23, Bank of Korea left rates steady at 3.5% and Governor Rhee noted that “Uncertainties over the timing of a rate cut have grown. If there is confidence that inflation stabilizes, the task of normalizing the rate level would need to be started.” The market now sees 50-50 odds of a 25 bp rate cut over the next three months and becomes fully priced in over the subsequent three months. Another 25 bp of easing is seen over the subsequent six months.

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