The top story in financial markets is the sell-off in the bond market. Losses have been led by the long end of the curve to deliver bearish yield curve steepening. While UK politics may be blamed for a small part of the global bond market sell-off, the bigger story is 10-year US Treasury yields rising to their highest levels since early 2025. This followed a raft of higher-than-expected US inflation data last week, where final demand PPI rose at 6% year-on-year in April – levels we have not seen since early 2023. This kind of inflation is pressure-testing the Federal Reserve and swinging behind the three dissenters at the April FOMC meeting, against the implicit easing bias in the FOMC statement. Looking at the bearish steepening in the bond market today, the narrative is one of the Fed potentially ‘falling behind the curve’ and the need to at least sound hawkish, even if it does not necessarily hike.
US data this week will not shed too much light on the inflation story. Perhaps Friday’s release of University of Michigan inflation expectations (final readings for May) will garner some interest. More interest will be taken in Fed speakers and communication this week. Wednesday’s release of the FOMC minutes will shine a light on the hawkish dissent; we’re more interested in Fed speakers, though, with Christopher Waller due to speak tomorrow and deliver a speech on the economic outlook on Friday. His most recent speeches seem to have pushed for a prolonged pause in monetary policy, but any shift towards the need for a hike would be dramatic. Were that to be seen, the yield curve would flatten, and the dollar would probably rally further.
High oil prices and now a sell-off at the long end of the bond market are a bearish double whammy for EMFX and for risk assets in general. And the highlight for US equity markets this week will be whether Nvidia’s earnings can deliver on Wednesday and keep the increasingly narrow advance of the S&P 500 ongoing. Given that equity markets have been an increasingly important driver of the dollar over recent weeks (risk on, dollar off), the challenges of continued high oil prices and now a bond market sell-off warn of a more difficult equity environment and the dollar staying supported.
DXY faces gap resistance at 99.50 and probably support at 99.00. Later today, we will also see US TIC data for March. So far, there have been no signs of foreigners leaving US securities markets in size. And the recent strength of the dollar is a reminder that last year’s loss of safe-haven status after Liberation Day tariffs was more cyclical than structural.
Chris Turner
think.ing.com