The Correction on US Yields Didn’t Hurt the Dollar


Yesterday’s US CPI caused investors to take a step backward and assess the standing uptrend in US/global yields. Both the headline CPI (1.2% M/M and 8.5% Y/Y) and core (0.3% M/M and 6.5% Y/Y) reached the highest levels since 1981/1982, but contrary to previous months, there was no upside surprise. Core inflation even rose less than expected. The jury is still out whether this marked some kind of peak. Even if so, a more important question is whether this will be start of a real and protracted slowdown (decline in M/M dynamics).

Whatever, after touching cycle peaks for yields at maturities longer than 5 year earlier, US bonds were caught in a ‘profit taking short-squeeze’. The US yield curve steepened with the 2-y/5-y easing 9.2/9.5 bps, the 10-y lost 5.9 bps. The 30-y still gained marginally (+0.1 bp). Markets now will look out for further Fed communication on frontloading of policy normalization. We don’t expect any change of the (hawkish) tone yet.

EMU markets showed a similar steepening move (German 2-y -5.3 bps, 30-y + 1.9 bps), but the correction was more modest as investors were looking forward to the assessment at the ECB meeting tomorrow.

The easing in the bond sell-off initially propelled US equities. However, headlines from Russian president Putin that talks with Ukraine were ‘at a dead end’ dampened optimism. Major US indices closed about 0.3% lower.

The correction on US yields didn’t hurt the dollar. On the contrary: DXY closed north of 100 for the first time since May 2020. EUR/USD immediately after the US CPI release touched the 1.09 area, but the move lacked momentum and persistent uncertainty on the war in Ukraine/Putin comments didn’t help. EUR/USD closed at 1.0828, within reach of the YTD low of 1.0806. USD/JPY also closed little changed at 125.38.

This morning, the pause in the US yield rally also gives some breathing room for Asia. Equity markets mostly trade in positive territory with Japan outperforming. The dollar remains well bid. USD/JPY (125.60) is again with reach of the 2015 top (125.86).

Later today, the calendar contains the US PPI (headline expected to rise to 10.6%). However, we doubt this report will change markets’ assessment after yesterday’s CPI release.

On interest rate markets, we look out whether yesterday’s correction as further to go. The picture/trend especially for LT yields both in the US and Europe hasn’t changed in any profound way. Especially in Europe, an ongoing rise in inflation expectations supports yields at longer maturities.

On FX markets question is whether EUR/USD can avoid a return/break of the 1.0806 YTD low. Probably a convincing anti-inflation message from Lagarde an Co is needed to ‘save’ the euro.

his morning, both UK core (5.7% Y/Y) and headline CPI (7.0% y/y) surprised on the upside. It questions recent soft BoE speak. Even so, sterling hardly gains in a first reaction (EUR/GBP 0.8330).

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