The dollar has been trading steady-to-softer in the latest phase, putting a little distance in from the rebound highs that were seen on Friday or yesterday versus the other G10+ currencies. The 10-year U.S. Treasury yield, which remains a big focus for currency markets currently, has tipped back under 1.490% after scaling above 1.50% yesterday, which had marked about a one-third retrace of last week’s sharp yield decline.
Oil prices have softened this morning after printing fresh 32-month highs yesterday, and other industrial commodities have also declined. Global stock markets have remained buoyant, but lacking direction.
The major focus is on the FOMC meeting, which starts today and concludes tomorrow.
Today’s calendar picks up significantly with the start of the FOMC meeting. The risks are for a less dovish, more hawkish spin: yields cheapened substantially as the FOMC started to loom up last week, despite a 13-year high in May CPI.
Investors should keep an eye on the US 10 Year, which has been coming back in the last couple of weeks. We think it could be caused by the 2 things. First, Congress has stalled on future spending. Second, and most importantly, the Fed does not appear to be raising rates.
Bonds, and the dollar, are now susceptible to a hawkish twist from this week’s policy review. With the Fed already in an ultra-accommodative stance, it will be nearly impossible for policy to be more dovish.
The Committee may acknowledge it has begun taper talks, even though the labor market is still far from recovered, and still being distorted by pandemic relief measures. Under the Fed’s new inflation tolerance policy rubric, a recovering labor market is a necessary condition for the Fed to start unwinding stimulus. The dot plot median should nonetheless show a rate hike in 2023, with the potential for an increase in high-end estimates.
Remember, the Fed wants to communicate its “assessment of progress toward its longer-run goals well in advance” of when it believes the time has come to trim QE. If the Fed deems that the time for discussing a plan for adjusting the pace of asset purchases has arrived, Treasury yields will spike and the dollar will rally. If not, both Treasury yields and the dollar will return to trading with a downside bias.
May retail sales, which are expected to fall 0.6% overall from an unchanged reading in April, and dip 0.1% on an ex-auto basis from -0.8% previously. Headline May PPI should rise 0.3% from the 0.6% increase previously, while the core reading is expected up 0.3% from 0.7% in April. May industrial production is penciled in at up 0.2%, from up 0.5% in April. May capacity use is forecast to have ticked up to 74.7% from 74.6%.
The June Empire State index likely eased to 22.0 from 24.3. April business inventories are expected to fall 0.1% from a 0.3% rise previously. The June NAHB housing market index is seen steady at 83. April TIC flow data are also due. The Treasury auctions $24 bln of reopened 20-year bonds.
The only large earnings report comes from Oracle.