Treasury Yields Breaking Higher

April 08, 2024

Treasury Yields Breaking Higher

  • USD is struggling to gain upside traction. But it’s only a matter of time until USD catches-up to rising Treasury yields.
  • Japan wage growth suggests the BOJ tightening process will be gradual.
  • The PBoC may be under pressure to weaken CNY.

USD struggled to gain upside momentum following the solid US March non-farm payrolls report Friday. However, 2 and 10-year Treasury yields broke higher to multi-month highs as the encouraging US growth outlook and resilient labour market curtail odds of Fed easing. In our view, it’s only a matter of time until USD catches-up to rising Treasury yields.

The US March CPI and PPI data will be key drivers of US interest rate expectations this week. Ahead of this data, the New York Fed reports March inflation expectations today (4:00pm London). 1-year expectations have been stuck near 3% for three straight months, still well above the 2% target. Both 3- and 5-year expectations picked up in February, another development that will keep the Fed on its toes. Chicago Fed President Austan Goolsbee (non-voter) speaks (6:00pm London). Goolsbee is one of nine who voted for 3 cuts in 2024.

EUR/USD is range-bound around 1.0836. The Eurozone Sentix investor confidence index is expected to improve further in April (9:30am London) but is unlikely to dent expectations of a June ECB policy rate cut (virtually fully priced). The Eurozone disinflationary process is well on track.

GBP/USD is range-bound around 1.2630. The UK labour market is cooling raising the likelihood the BOE starts easing in June (over 70% priced). The jobs report released by the Recruitment & Employment Confederation, KPMG and S&P Global showed wages for new permanent recruits rose at the slowest pace in three years in March and the permanent hiring index slipped deeper into contraction territory. BOE Deputy Governor Sarah Breeden speaks on a panel titled “Towards the future of the monetary system” (4:30pm London).

USD/JPY is trading near the top of a multi-day 151.00-152.00 range underpinned by rising US Treasury yields. Japan wage growth suggests the BOJ tightening process will be gradual which can further weigh on JPY. In line with consensus, nominal cash earnings rose 1.8% y/y in February vs. 1.5% in January. The less volatile scheduled full-time pay growth printed for a third consecutive month at 2.1% y/y in February. In real terms, the decline in total cash earnings quickened to -1.3% y/y in February from -1.1% in January.

Japan’s February balance of payments is neutral for JPY. The current account deficit narrowed in February to ¥1.3686 Tn from ¥2.7463 Tn in January. But net portfolio investment outflows eased in February to -¥1.2714 Tn from ¥-2.8027 Tn in January.

AUD/USD is trading firmly around 0.6580 supported by a modest recovery in iron ore prices and widening AU-US bond yields. In Australia, demand to purchase new dwellings remains subdued. The value of new housing loans commitments rose less than expected in February at 1.5% m/m (consensus: 2%) on soft loan growth to owner-occupier (+1.6% m/m) and investor (+1.2% m/m). The “time to buy a dwelling” sub-index from the Westpac consumer sentiment survey suggests buying sentiment will stay weak.

The PBoC daily USD/CNY fixing has been broadly steady around 7.1000 since December 2023. But the PBoC may be under pressure to materially lift the fixing (weaken CNY) as USD/CNY has traded near the 2% intra-day cap over the past few weeks on USD strength.

National Bank of Poland releases minutes of its March meeting today (1:00pm London). At the March 6 meeting, the bank kept rates steady at 5.75% and Governor Glapinski said no MPC members are talking about rate cuts in 2024. The market is pricing in nearly 50 bp of rate cuts over the next 12 months. We see risks that the NBP delivers more easing than is currently priced in, as inflation is running below the 2.5% target and domestic demand activity remains weak. Nevertheless, escalating tension between the government and the central bank governor complicates the policy rate path projection.

Philippine central bank is expected to keep rates steady at 6.5% (8:00am London). At the last meeting February 15, the central bank kept also stood pat. However, the tone tilted less hawkish as the bank noted “The risks to the inflation outlook have receded but remain tilted toward the upside” and added that it was “appropriate to keep policy settings unchanged in the near term.” The swaps market is pricing in the start of an easing cycle over the next three months as well as 125 bp of total easing over the next year.

Bank of Israel is expected to keep rates steady at 4.5% (2:00pm London). However, the market is split as nearly half the analysts polled by Bloomberg see a 25 bp cut to 4.25%. At the last meeting February 26, the bank delivered a hawkish surprise and kept rates steady at 4.5% vs. an expected 25 bp cut. Governor Yaron warned of the inflationary risks from fiscal policy but said the bank can continue cutting rates if inflation stabilizes. The market is pricing in 50-75 bp of easing over the next year that would see the policy rate bottoming between 3.75-4.0%.

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