Intraday Market Thoughts

Indices, Yields, USD Trifecta?

by Adam Button
Jan 8, 2021 12:58

Indices hit new highs along with further strength in bond yields and a recovering US dollar. The resulting pullback in metals from higher yields is also helping USD stabilize. A strong ISM services index on Wednesday and the non-stop buying in equities highlighted the strong economic outlook but there's a catch. The US dollar is again the top performer while the yen lagged. Non-farm payrolls are due up next. A set of new trades will be issued to the Premium Insights after the US jobs report.  Below is the 10 yr yield analog between today and late 2012-early 2013, which not only suggests 1.50% yields ahead, but also potential challenges for gold if inflation fails to keep up with yields. If If real yields join the party, then happier days are ahead for the US dollar. 

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Indices, Yields, USD Trifecta? - Us 10 Yr Yield Jan 8 2020 (Chart 1)

At the moment, it's almost a perfect storm in risk assets. All bad news is discounted because of the vaccine and good news is cheered as another sign that the economy will be stronger. Another example was on Wednesday with the ISM services index at 57.2 compared to 54.5 expected.

That survey was taken before the latest $900B stimulus and whatever else Democrats have planned on the spending file.

US equities jumped to a new record after the number and the US dollar benefited from investment flows.

The catch is bonds. Treasury yields continued to creep up with 10s rising another 4.6 bps to 2.11%. As yields rise, they may be triggering foreign hedges or other flows that put a bid in the dollar. We will be interesting to see how the FX market performs once rates flatten out for a few days.

In the big picture, the market isn't going to fret about rates anywhere near these levels but they will eventually work against equities and provide a significant tailwind for the dollar. Whether that's at 1.4%, 1.6% , 2% or beyond remains to be seen.

How much steeping is even possible is another question. The Fed's Evans offered the first hint at the tapering timeline Wednesday saying it could be in late 2021 or in 2022 if the economy is strong (something that's looking more likely). He paired that with a forecast that the Fed funds rate would stay at zero until mid-2024.

Looking ahead, the jobs report is up next and expectations are modest at +50K. It's tough to envision this edition being a big market mover because if it's soft, it will be brushed off because of looming stimulus. If it's strong, it could push current ranges even further, particularly in USD/JPY.


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