Dollar Drops as Bond Yields Fall on US Inflation and Personal Spending Reports

The dollar index (DXY00) on Friday fell slightly by -0.04%.  The dollar was undercut by Friday’s -5 bp decline in the US 10-year T-note yield after the US PCE deflator report was in line with market expectations and kept alive hopes for the Fed to cut interest rates later this year.  T-note yields also fell on Friday’s weaker-than-expected US personal spending report.

The April PCE deflator report of +0.3% m/m and +2.7% y/y was unchanged from March and was in line with market expectations.  The April core PCE deflator report of +0.2% m/m and +2.8% y/y was also in line with market expectations.  The PCE deflator is the Fed’s preferred inflation measure. 

The April PCE deflator report of +2.7% y/y remained 0.2 points above the 3-year low of +2.5% y/y posted in January and February.   The core PCE deflator report of +2.8% y/y was unchanged from the 3-year low of +2.8% posted in February and March.  The nominal and real PCE deflators are still well above the Fed’s 2% inflation target, but those measures are at least near or at 3-year lows.

Meanwhile, April US personal spending rose +0.2% m/m, down from March’s revised +0.7% (preliminary +0.8%) and slightly weaker than market expectations of +0.3%.  April real personal spending fell -0.1% m/m, weaker than expectations of +0.1%.   April US personal income rose +0.3% m/m, down from March’s +0.5% but in line with market expectations.

In mildly hawkish comments, Dallas Fed President Lorie Logan said late Thursday afternoon that policy “is just not as restrictive as we think it might have been relative to the level of interest rates before the pandemic.”  She said, “It’s really important to keep all the options on the table and that we continue to be flexible,” which seemed to indicate she wants to leave open the outside possibility of a rate hike.  However, she also said there are good reasons to believe we’re still on the path to 2% inflation. 

The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting, 14% for the following meeting on July 30-31, and 60% for the meeting after that on Sep 17-18.

EUR/USD (^EURUSD) on Friday rose by +0.12%.  The euro saw support from Friday’s slightly hawkish Eurozone CPI report, which put upward pressure on Eurozone bond yields.  The German 10-year bund yield on Friday rose slightly by +0.1 bp to 2.664% despite the fairly large -5 bp drop in the US 10-year T-note yield.

The Eurozone May preliminary CPI rose to +2.6% y/y from +2.4% in April and was slightly stronger than market expectations of +2.5%.  The Eurozone May preliminary core CPI rose to +2.9% y/y from +2.7% in April and was stronger than market expectations of +2.7%.

The Eurozone CPI report didn’t have much impact on nearly unanimous expectations for the ECB at its meeting next Thursday to cut its benchmark rate by -25 bp.  However, Friday’s CPI report dampened expectations for further ECB rate cuts after next week’s meeting. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for its next meeting on June 6. If the ECB cuts rates by -25 bp on June 6 as expected, then the markets are expecting a 0% chance of another rate cut at the following meeting on July 18 and a 50% chance of a rate cut at the September 12 meeting.

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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.

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