High Bond Yields Rattle Markets

May 30, 2024

High Bond Yields Rattle Markets

  • Firmer global bond yields triggered a sell-off in equities and outperformance of safe haven currencies.
  • The Fed Beige Book was balanced and supports Fed funds futures pricing of a first cut over Q4. There are no policy-relevant US economic data releases today.
  • Sweden’s economy unexpectedly expands in Q1 but details are unimpressive.

USD is consolidating gains underpinned by high US Treasury yields. Weak demand for Treasuries following this week’s auctions of 2, 5 and 7-year notes suggests investors are demanding a higher premium to accept risk from holding Treasuries.

The recent lift in Treasury yields dragged global bond yields higher, contributing to a sell-off in equities and the outperformance of safe haven currencies (JPY & CHF). JPY is also bid on speculation Japanese officials intervened. Japan’s Ministry of Finance will disclose any intervention tomorrow.

In our view, USD has scope to resume its year-to-date uptrend against most major currencies. First, the May global PMI prints showed growth momentum has shifted back in favour of the US. Second, the healthy US macro backdrop justifies the Fed’s higher-for-longer policy rate narrative.

The Fed Beige Book was balanced and supports Fed funds futures pricing of a first cut over Q4. The Beige Book points out that “national economic activity continued to expand from early April to mid-May” but “overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks”. Meanwhile, “contacts in most Districts noted consumers pushed back against additional price increases” suggesting modest price growth in the near term.

Atlanta Fed President Raphael Bostic (voter) reiterated overnight the Fed can wait for Q4 before reducing rates as “breadth of price gains is still pretty significant”. Later today, New York Fed President John Williams (5:05pm London) and Dallas Fed President Lorie Logan (non-voter) (10:00pm London) speak. There are no policy-relevant US economic data releases today, but the weekly jobless claims data can generate some volatility (1:30pm London).

EUR/USD drifted down under 1.0800 on USD strength. Nevertheless, the modest improvement in the Eurozone growth outlook suggests back-to-back ECB policy rate cuts are unlikely which can cushion declines in EUR. The Eurozone economic sentiment index is forecast to rise to 96.1 in May vs. 95.6 the previous month (10:00am London).

SEK ignored the unexpected increase in Sweden’s Q1 GDP. Real GDP rose 0.7% q/q in Q1 (consensus: 0%) after stagnating the previous quarter. The details were unimpressive as the largest contribution to the growth came from changes in inventories (0.5pts) while household consumption was the major drag (-0.1pts). Overall, the GDP report is unlikely to change the Riksbank’s guidance of slashing the policy rate two more times during the second half of the year.

AUD/USD tracked iron ore prices lower. Iron ore futures on the Dalian and SGX exchanges plunged to a two-week low on lower demand prospect from China. China’s State Council projects to cut the country’s energy consumption and carbon dioxide emissions per unit of GDP by about 2.5% and 3.9% respectively in 2024.

Australia business investment remains an important growth tailwind. Private new capital expenditure (capex) rose more than expected in Q1 (actual: 1.0% q/q, consensus: 0.7%) driven by non-mining industries. Moreover, expectations of planned capex for 2023/24 and 2024/25 were revised higher compared to three months ago. Meanwhile, the outlook for dwelling investment remains weak. Building approvals unexpectedly dropped 0.3% m/m in April (consensus: +1.8%) after rising 2.7% in March. RBA Assistant Governor (Economics) Sarah Hunter did not offer new policy insights during her fireside chat overnight.

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