The US dollar is at the lowest levels of the day against EUR, GBP, AUD and NZD. That’s come with a better mood in equity markets.
News flow has been light since Friday so nothing has really changed on the economic front (the aliens still haven’t invaded) but there’s some optimism brewing. That’s a real vote of confidence, or foolishness, ahead of tomorrow’s CPI report. It could also argue that some angst about a high reading is already built into the market. Certainly in bonds, we’ve seen 10s rise to 3.71% from 3.40% at the start of the month.
At this point, market participants might be saying that the risk outweighs the reward or that the economy is strong enough to handle 5-5.5% rates.
Over in Fed fund futures, the terminal top is now at 5.20% which fully prices in 5-5.25% and more by July. That clashes with some tough y/y comps in the inflation space in the next few months. What might end up being the challenge for the Fed is that inflation falls at a faster-than-expected clip but employment stays hot. That’s going to leave them in a spot where they’re reliant on forecast for what to do next rather than data.
In any case, tomorrow’s CPI report is a huge risk event but for now, the mood is upbeat.
