Of course, the yield of the two-year has been higher in the past, however, what the current yield is suggesting is the US Treasury market now expects the Federal Reserve to deliver at least two further rate increases this year possibly even three. The Powell Fed has hinted as such and certainly let in be known that an emotional equity market would not stop it from doing so, if it felt the economy needed such adjustment.
The current yield curve is rather flat with t2/t10 at +49.9bps and has not been so narrow since before the financial crisis. The signal is that growth is off its potential and inflation should not gallop away, even though several economists are increasing their inflation forecasts out to 2021.
All this poses a problem as investment funds will happily mop up higher yields on AAA/AA rated fixed income debt and yet given monetary accommodation has been in place for the past decade, many are not well versed as to how they should strategically deploy their investment funds under management over the next 12 to 36 months.
Foreign Exchange:
The Dollar surged on Friday, driven higher by a rising yield on U.S. Treasury notes. The U.S. Dollar Index was at a two-week high, rising 0.59% to 90.17.
A spike in U.S. Treasury bond yields in February led to a steep decline in equity markets, as investors flocked to the Dollar in anticipation that inflation could lead to an increase in interest rate hikes by the Federal Reserve.
The Dollar gained ground against the Yen, with USDJPY rising 0.40% to 107.79.
Sterling was lower amid dovish comments from Bank of England Governor Mark Carney, as investors grow uncertain of a rate hike in May. GBPUSD fell 0.50% to 1.4017.
The Euro was down, with EURUSD falling 0.65% to 1.2266 as investors worry that the euro zone’s economy is rebounding, and the European Central Bank could wait to tighten monetary policy.
Falling back was the Canadian Dollar as data on inflation and retail sales was disappointing. USDCAD rose 0.46% to 1.2729 after inflation rose by 2.3% in March. A separate report showed that retail sales rose by just 0.4% in February.
Commodities:
Metals:
Gold prices dropped on Friday, marking yet another price reversal for the precious metal this year. Gold futures were on track for their first back-to-back loss in more than two weeks. Expectations for inflation are now at their highest level in years and one must think about gold as an inflation hedge.
While many see Treasury-inflation protected securities as a strong hedge against a sudden surge in inflation, we have highlighted gold as an inflation hedge in the past few weeks. If inflation does end up moving higher than expected in the coming years, investors could be caught by surprise, which would then offer an opportunity to buy gold. The monthly technical aspect targets 1365-1389 and then 1410.
Oil:
Gold prices dropped on Friday, marking yet another price reversal for the precious metal this year. Gold futures were on track for their first back-to-back loss in more than two weeks. Expectations for inflation are now at their highest level in years and one must think about gold as an inflation hedge.
While many see Treasury-inflation protected securities as a strong hedge against a sudden surge in inflation, we have highlighted gold as an inflation hedge in the past few weeks. If inflation does end up moving higher than expected in the coming years, investors could be caught by surprise, which would then offer an opportunity to buy gold. The monthly technical aspect targets 1365-1389 and then 1410.
Economic Calendar, all times are BST:
When/Nation Data Point/Event Expect Prior
Monday 23rd:
0830 GER Manufacturing PMI APR Preliminary 57.5 58.2
1500 USA Existing Home Sales MAR 5.55M 5.54M
Tuesday 24th:
0900 GER IFO Business Climate Index APR 102.6 114.7
1500 USA CB Consumer Confidence APR 126.0 127.7
1500usa New Home Sales MAR 630K 618K
Wednesday 25th:
1530 USA Crude Oil Inventories -1.429M -1.071M
Thursday 26th:
1245 EZ Deposit Facility -0.40%
1245 EZ ECB Marginal Landing Rate 0.25%
1245 EZ Refinancing Rate APR 0.00% 0.00%
1330 EZ ECB Press Conference
1330 USA Core Durable Goods MoM MAR 0.50% 1.00%
Friday 27th:
0900 GER Unemployment Claimant Change APR -15K -19K
0930 UK GDP YoY Q1 Preliminary 1.4% 1.4%
0930 UK GDP QoQ Q1 Preliminary 0.3% 0.4%
1330 USA GDP QoQ Q1 Preliminary 2.0% 2.9%
Have a great week
