USD vs 10YR

Weekly Stock Market Report: Tapering on the Agenda?

Key Drivers for the Week of June 7, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

  • Central bank QE dynamics continue to preoccupy the markets
  • Will ECB maintain a “significantly” enhanced monthly purchase schedule
  • Bank of Canada expected on hold after trimming weekly QE in April by C$3 bln
  • Underwhelming U.S. jobs report eases market worries over Fed tapering
  • U.S. focus on CPI, sentiment, JOLTS, trade; Treasury auctions $120 bln in coupons
  • China trade CPI, PPI; Japan has revised GDP, PPI, BSI business outlook survey
  • German production, trade, manufacturing orders; Eurozone final Q1 GDP data due
  • UK: jump in virus threatens scheduled June 21 reopenings; GDP, trade, production due

The dollar has lifted out of its post-U.S. jobs report lows, as has the 10-year Treasury yield. Both remain well off their pre-data levels, however, being modestly firmer in a “dust settling” trade following the sharp drops that both the greenback and longer-dated bongs saw in the wake of the data miss on Friday. The DXY USD index earlier scaled to a rebound high of 93.30 after printing a low at 90.03 on Friday. The 24-day high that was seen ahead of the U.S. data is at 90.63.

The disappointing jobs report will remain the focus after the data-soothed worries that the FOMC will start to think about tapering sooner than later. Tapering risks continues to preoccupy the markets as the global recovery zooms ahead and inflation gauges surge higher. Treasury yields had been on the rise on that threat, and shorts scrambled to cover following the data.

Market participants are now focusing on Thursday, which is when the ECB will announce its decision following its latest policy review and when the U.S. releases May CPI data, which has heightened impact potential on markets given the prevailing focus on the Fed tapering debate.

We retain a dollar bullish view in the bigger picture, putting weight on the outsized level of fiscal stimulus in the U.S. while anticipating an eventual pivot at the Fed. For now, however, the higher inflation rate in the U.S. relative to peers coupled with investors continuing to buy into the Fed’s policy stance should keep the greenback on a weakening tack.

The 4HR chart above shows the USD vs. the 10YR US starting in April. The interesting thing is that the 10YR is down -8.54% compared to the USD -3.36. We think this is confirmation that the USD will not drop in value as inflation rates increase. However, bond rates will likely go up as they have historically in markets. We will be watching the USD to see how it responds to the CPI Report.

The ECB is in the spotlight this week, with the main question of whether or not the bank will maintain the “significantly” enhanced monthly purchase schedule. A thin data docket in the U.S. puts the emphasis on May CPI, where further acceleration in the annual growth rate is anticipated.

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