Dollar Supported by High Yields Ahead of Record 5-year Note Auction

April 24, 2024

Win Thin

U.S. yields remain elevated in the midst of heavy supply; S&P Global reported soft preliminary April PMIs; growth remains robust; BOC releases its summary of deliberations; Canada reports February retail sales
Germany IFO survey was firm; ECB GC member Nagel sounded cautious; U.K. CBI April industrial trends survey was mixed; BOE Chief Economist Pill was cautious
Australia CPI data ran hot; Indonesia hiked rates 25 bp to 6.25%

The dollar is bid ahead of a record 5-year note auction. DXY is trading higher near 105.808 as UST yields remain elevated amidst heavy supply (see below). The euro is trading lower near $1.0690 despite the stronger than expected German IFO survey (see below). Elsewhere, sterling is also trading lower near $1.2435 while USD/JPY traded at a marginal new high near 154.95 today. AUD is outperforming on higher-than-expected CPI data (see below). The dollar rally should continue as data confirm persistent inflation and robust growth in the U.S. This backdrop along with upcoming heavy UST supply should keep upward pressure on U.S. yields, which in turn would be supportive of the dollar. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

U.S. yields remain elevated in the midst of heavy supply. The 2-year yield is trading at 4.94% and remains on track to test the October high near 5.26%, while the 10-year yield is trading near 4.63% and remains on track to test the October high near 5.02%. Treasury auctions a total of $183 bln in 2-, 5-, and 7-year notes this week. The second leg is today with $70 bln of 5-year notes to be auctioned. Bid/cover ratio was 2.41 at the previous auction, while indirect bidders took 70.5%. Yesterday, there was strong demand for 2-year notes as Treasury sold $69 bln at a yield of 4.898%. Bid/cover rose to 2.66 from 2.62 previously and indirect bidders took 66.2% vs. 65.8% previously. The auctions finish tomorrow with $44 bln of 7-year notes.

S&P reported soft preliminary April PMIs. Manufacturing came in at 49.9 vs. 52.0 expected and 51.9 in March, services came in at 50.9 vs. 52.0 expected and 51.7 in March, and the composite came in at 50.9 vs. 52.0 expected and 52.1 in March. This was the lowest reading for the composite PMI since December. However, the more widely watched ISM PMIs won’t be reported until next week. Despite the weak readings, Fed easing expectations remain steady. Odds of a June cut have fallen to 15%, while odds of a July cut have fallen to 45%. Even a September cut is not fully priced in, with odds falling to 90%.

Growth remains robust. The Atlanta Fed GDPNow model is tracking Q1 growth at 2.9% SAAR and its final read will be released today after the data, followed by its initial Q2 estimate Friday. The New York Fed GDP nowcast model’s final estimate for Q1 growth was 2.2% SAAR. This model sees Q2 growth at 2.8% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June. Official Q1 GDP data will be reported tomorrow. Growth is expected at 2.5% SAAR vs. 3.4% in Q4 2023, with personal consumption the main growth driver at an expected 3.0% SAAR.

Bank of Canada releases the summary of its deliberations. Recall, the BOC left rates steady at 5.0% at the April 10 meeting. Governor Macklem did not rule out a June rate cut, noting it was “in the realm of possibilities”. Otherwise, it was a neutral hold because the BOC is still concerned that lowering policy interest rate too early or cut too fast could jeopardize the progress on inflation. It lowered its Q1 2024 CPI inflation forecast to 2.8% vs. 3.2% previously but still saw inflation reaching 2% by Q4 2025. Lastly, the BOC raised its estimate of the nominal neutral interest rate by 25 bp to a range of 2.25% to 3.25%.

Canada also reports February retail sales. Statistics Canada’s advanced retail indicator suggests sales rose 0.1% m/m in February following a -0.3% decline in January. Of note, sales ex-autos are expected at 0.1% m/m vs. 0.5% in January. Going forward, the Bank of Canada projects population growth to boost consumer spending in the first half of 2024. The market sees 60% odds of a cut June 5, and becomes fully priced in July 24.

Mexico reports mid-April CPI data. Headline is expected at 4.51% y/y vs. 4.37% previously, while core is expected at 4.38% y/y vs. 4.41% previously. If so, headline would be the highest since mid-January and further above the 2-4% target range. At the last meeting March 21, Banco de Mexico started the easing cycle with a 25 bp cut to 11.0% and signaled a data-dependent path. Recent peso weakness and rising inflation argue for caution going forward. The market is pricing in 100 bp of easing over the next year vs. 200 bp seen in March. Next meeting is May 9 and while a cut is possible, it will depend in large part on the peso.

EUROPE/MIDDLE EAST/AFRICA

Germany IFO survey was firm. Headline came in at 89.4 vs. 88.8 expected and a revised 87.9 (was 87.8) in March. This was the highest since May 2023, driven by significant increases in both expectations and current assessment to 89.9 and 88.9, respectively. Germany’s growth outlook has improved a little bit but it’s too soon to tell if the recovery will be sustained. German May GfK consumer confidence will be reported tomorrow and is expected at -26.0 vs. -27.4 in April.

European Central Bank GC member Nagel sounded cautious. He said that if the data show progress in reaching the 2% target, “I would be in favor of a rate cut in June. However, such a step would not necessarily be followed by a series of rate cuts.” Most ECB officials have signaled that the first cut will come in June. After that, there isn’t much agreement as the split between the hawks and doves remains in place. De Cos, Nagel, Villeroy, and Cipollone speak today.

U.K. CBI April industrial trends survey was mixed. Total orders came in at -23 vs. -16 expected and -18 in March, while selling prices came in at 27 vs. 20 expected and 21 in March. Business optimism rose to 9 vs. -3 in March. CBI distributive trades survey will be reported tomorrow, with retailing reported sales expected at -3 vs. 2 in March. April GfK consumer confidence will also be reported tomorrow and is expected at -20 vs. -21 in March.

BOE Chief Economist Pill was cautious. He emphasized yesterday that the time for cutting rate is some way off because there was “still a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilized.” Recent data suggest inflation remains sticky and if this persists, there are clear risks that easing expectations get pushed further out. The Bank of England is still expected to cut rates August 1, with a second cut December 19 fully priced in.

ASIA

Australia CPI data ran hot. Headline came in a tick higher than expected at 3.5% y/y after holding steady at 3.4% for three straight months, while trimmed mean picked up a tick to 4.0% y/y. Elsewhere, Q1 headline inflation also came in a tick higher than expected at 3.6% y/y vs. 4.1% in Q4, while Q1 trimmed mean came in two ticks higher than expected at 4.0% y/y vs. 4.2% y/y in Q4. Australia inflation is still above the 2-3% target range and tracking higher than the RBA’s projections. The RBA will be in no rush to loosen policy anytime soon, which is AUD supportive. The market has virtually priced out any odds of a rate cut this year.

Bank Indonesia hiked rates 25 bp to 6.25%. It was a hawkish surprise as most were looking for steady rates, although a third of the analysts polled by Bloomberg look for the 25 bp hike. The bank said the hike is meant to stabilize the rupiah and to help prevent imported inflation. It reiterated its readiness to intervene in financial markets to maintain IDR stability, and Governor Warjiyo noted that foreign reserves are sufficient to help stabilize the rupiah. The recent depreciation in IDR is largely a reflection of broad USD strength and rising U.S. Treasury yields. As such, today’s hike will only serve to slow rather than reverse the uptrend in USD/IDR.

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