Bonds are taking a beating today and the US dollar is following. US Treasury yields are higher by 6-9 bps across the curve today despite a weaker retail sales report.
With CPI and retail sales out of the way, the market is now free to focus on next week’s Fed decision and with rate cut coming, the focus will be entirely on the dot plot. Right now, the market is saying that the Fed is likely to shift to a median of two rate cuts versus three previously.
“The logic is relatively
straightforward; the market isn’t convinced that the Fed should hold on to the
75 bp rate cut messaging and any evidence that could sway the dots higher will
provide fodder for a hawkish skew on next week’s events,” writes BMO fixed income strategist Ian Lyngen today.
Current market pricing is for 76 bps in cuts this year but that always reflects tail risks, so I’d peg it more at 60 bps.
The dollar is running with the theme as well, with EUR/USD down 44 pips and testing the weekly low.
EURUSD 1 hour chart
What I fear is that the market is making too much of the dot plot. It’s really all about the economic data and everyone at the Fed has an easing bias. We’ve had two soft retail sales reports to start the year and the ISM services survey ticked lower this month.
By the time of next week’s decision, the Fed won’t have nearly enough data to signal on June and they won’t want to take it off the table. Maybe there are lingering worries about inflation but price pressures are mostly confined to shelter right now, which is a laggard.
If a couple of dots move up, it will skew the median but I don’t think it will change the Fed’s game plan. They will cut in June if the evidence says it’s time to cut and the 2 vs 3 cuts debate is just as likely to be settled in December as it is in June. That probably sells up a sell-the-fact trade on the US dollar next week but we still have a few days to get through before then.