USD Charging North on Interest Rate Bets
$DIA, $SPY, $QQQ, $VXX
The US climbed to its highest level in about 14 years Vs a basket of peer currencies Friday, while US T-Bond yields were set for their biggest fortnightly rise in 13 years on bets US inflation and interest rates are headed North.
A growing perception that the economic policies of US President Elect Donald Trump will push up consumer prices helped put the Buck on track for its biggest 2 week gainer against Japanese Yen in almost 30 years.
European shares ticked down and US stocks finished flat on Wall Street.
Data on Thursday suggesting the US jobs market is tightening and inflation is gaining traction have bolstered a view that US growth and inflation could accelerate if and when the Trump Administration cuts taxes and increases fiscal spending.
Last week’s US election result has prompted investors to ditch their once solid conviction that growth in developed economies will remain soft because of tough competition from EMs (emerging market) economies with lower wages.
That has led to a repricing of assets, most notably in currency and bond markets.
What we’re looking at is a broad shift of investment back to the US.
Fed policymaker James Bullard said Friday he is leaning towards supporting a rate rise in December, adding that a plethora of potential changes under Donald Trump could affect future policy.
The 10-year US Treasury yield rose to 2.34% its highest since December. It is up about 51 bpts over the last 2 weeks – the biggest 2 week rise in 13 years.
Global bond indices are set for their biggest 2-week loss in decades in a sign that a 30 year Bull Run for fixed income could be at a reversal point.
Barclays Global Aggregate Bond Index is poised to record a 4% loss over the last 2 weeks, its steepest fall since Y 1990, according to the data.
Rising bond yields across the globe also reflect a reassessment of the Fed’s policy path down the road, beyond a likely rate hike in December.
Fed Chair Janet Yellen said on Thursday that Trump’s election has done nothing to change the Fed’s plans for a rate rise “relatively soon.”
Money markets are starting to price in one or more rate hikes next year, a sea change from before the election when they priced in a less than 50% chance of a Y 2017 rate hike.
As per the CME’s FedWatch Tool, the implied probability of an interest rate hike at the December FOMC meeting has increased to 95.4% from Thursday’s 90.6%.
A rising USD is a problem for some emerging economies that could see potentially destabilizing capital outflows.
The Mexican Peso, a lightning rod for market anxiety over Donald Trump. Investors were disappointed the central bank raised rates by only 50 bpts to 5.25% Thursday to stem the sell-off, which saw the currency plunge to record lows after the US Election.
Friday, the US major stock market indexes finished at: DJIA -35.89 at 18867.93, NAS Comp -12.46 at 5321.51, S&P 500 -5.22 at 2181.90
Volume: Trade was heavy with about 1.7-B/shares exchanged on the NYSE
- Russell 2000 +15.9% YTD
- DJIA +8.3% YTD
- S&P 500 +6.8% YTD
- NAS Comp +6.3% YTD
Have a terrific weekend