Treasury yields are at new session highs and so is the US dollar.
GBP/USD is a good illustration of the ride it’s been today as the pound first rallied on high inflation only to be swept away by a broad dollar bid.
The commodity currencies are the laggards today as the market prices in higher rates later and a recession later. It’s a strange dynamic where rates dominate but at some point, I wonder if it flips in a goldilocks scenario where rates remain high but inflation comes down and there’s no recession.
For the near-term, the focus is now on non-farm payrolls on Friday and the CPI report next week. There’s a case to buy bonds after a strong non-farm payrolls report because June CPI will cool. But I wonder if the market isn’t looking further out at high inflation and a strong economy.
Still, the market could also be missing softening non-US demand and how that could lead to lower inflation (and a higher US dollar). So the relief value for the current US dynamic might be a stronger dollar, not higher rates.
I also worry that the Fed may lose its best weapon: Fear.
Fear of high rates is what capped assets in the past year but that has clearly faded in stocks and may now be doing the same in real estate. The fear of 5.5% Fed funds may have been more powerful than the reality. Now that the market has seen the boogeyman, it may no longer be scary. That could lead to a re-acceleration in housing and inventory restocking.