Dollar Gains as Bond Yields Jump on Strength in US Retail Sales

Rich Asplund - Barchart - Mon Apr 15, 9:37AM CDT

The dollar index (DXY00) this morning climbed to a 5-1/4 month high and is up +0.10%. The dollar gave up overnight losses and moved higher as the 10-year T-note yield jumped to a 5-month high after US March retail sales rose more than expected, a hawkish factor for Fed policy. The dollar today initially moved lower on reduced liquidity demand as stocks rallied after geopolitical concerns eased on hopes the conflict between Iran and Israel will be contained by diplomatic efforts. Also, dovish comments from New York Fed President Williams undercut the dollar when he said he expect the Fed to start cutting interest rates this year.

US Mar retail sales rose +0.7% m/m, stronger than expectations of +0.4% m/m. Also, Mar retail sales ex-autos rose +1.1% m/m, stronger than expectations of +0.5% m/m and the biggest increase in 14 months.

The US Apr Empire manufacturing survey general business conditions rose +6.6 to -14.3, weaker than expectations of -5.2.

US Feb business inventories rose +0.4% m/m, right on expectations.

The US Apr NAHB housing market index was unchanged at 51, right on expectations.

NY Fed President Williams said, "We will need to start a process at some point to bring interest rates back to more normal levels, and my own view is that process will likely start this year."

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on April 30-May 1 and 23% for the following meeting on June 11-12.

EUR/USD (^EURUSD) today is down by -0.12%. The euro gave up an early advance and turned lower and is under pressure today after several ECB members today expressed their support for an ECB interest rate cut in June. The euro today initially moved higher after Eurozone Feb industrial production rose as expected. Also, comments from ECB Governing Council member Kazimir boosted the euro when he said an economic recovery in the Eurozone is taking hold.

Eurozone Feb industrial production rose +0.8% m/m, right on expectations.

ECB Governing Council member Kazimir said an economic recovery in the Eurozone is taking hold and will quicken in the second half of this year. He added that inflation shows signs of a sustained retreat and is opening the door for the first ECB rate cut in June.

ECB Governing Council member Simkus said he sees three ECB rate cuts this year with a "higher than 50% chance" of a fourth rate cut.

ECB Governing Council member Villeroy de Galhau said, "Bar a surprise, the ECB should decide on the first rate cut at its next meeting on June 6."

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 89% for its next meeting on June 6 and fully priced in (+138%) that rate cut for the following meeting on July 18.

USD/JPY (^USDJPY) today is up by +0.75%. The yen today tumbled to a new 33-year low against the dollar. The yen is under pressure from a Reuters report today that said BOJ members are wary of phasing out stimulus too soon and may not be ready to raise interest rates even if inflation forecasts are upgraded. The extended its losses today after the 10-year T-note yield jumped to a 5-month high. A positive factor for the yen was today’s report on Japan Feb core machine orders, which posted its biggest increase in 13 months.

A Reuters report said that many BOJ members are wary of phasing out stimulus too soon, and "even if inflation forecasts are upgraded, that alone won't trigger a policy shift."

Japan Feb core machine orders rose +7.7% m/m, stronger than expectations of +0.8% m/m and the largest increase in 13 months.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 0% for the April 26 meeting and 29% for the following meeting on June 14.

June gold (GCM4) this morning is down -24.3 (-1.02%), and May silver (SIK24) is down -0.015 (-0.05%). Precious metals this morning are lower. An easing of geopolitical tensions is undercutting safe-haven demand for precious metals in hopes that diplomatic efforts will contain the Iran-Israel conflict. Also, a stronger dollar and higher global bond yields today are bearish for precious metals. In addition, today’s sharp rally in stocks has curbed safe-haven demand for precious metals.

Precious metals have support as a store of value on dovish central bank comments. New York Fed President Willimas said he expected Fed rate cuts to begin this year, and several ECB members today expressed their support for ECB interest rate cuts to begin in June. Silver has carryover support from today’s rally in copper prices to a 1-3/4 year high. Also, supply concerns have given silver prices a boost since the US and UK imposed new restrictions on trading Russian aluminum, copper, and nickel.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.