The Briefing, a respected source of experienced analysis and insight, continues its 25-year tradition by providing an in-depth report today. This daily publication offers comprehensive background information rather than specific guidance for FX trading. As markets anticipate the release of crucial economic data, including durable goods, jobless claims, pending home sales, and a fresh estimate of Q1 GDP, investors are keenly watching for indications of economic trends.
The Q1 GDP data, expected to reveal personal consumption spending, is particularly significant as it provides clues for the upcoming PCE inflation figures due on Friday. Some components of the current data present concerns. Notably, shelter costs rose by 7.9% year-over-year in January, coupled with a 10.1% increase in food prices. Although energy prices have fallen, the overall net increase remains at 6.4%.
Tariff expectations are impacting the dollar's performance in the market. With new tariffs set to begin next week for Canada and Mexico, and Europe now included following recent developments, the dollar experiences a push. The European Union, being the third-largest economy globally, adds significant weight to these developments.
In February, inflation likely eased, particularly in France, due to a marked reduction in regulated electricity prices. This potential easing comes after a Q4 GDP growth rate of 2.3%, with expectations that the forthcoming data will indicate an economic slowdown.
The US stock market serves as a barometer of risk appetite, influencing the dollar's value. Recently, two-year yields reached their lowest since before November's election but have firmed again to 4.1%. Meanwhile, PCE and core PCE inflation readings are anticipated on Friday, with forecasts suggesting a rate of 2.6%. A slowdown or drop in PCE inflation might lead Fed funds bettors to advance their rate cut forecast, currently standing at an 80% probability for June.
Bond market activity reflects underlying economic concerns. On Wednesday, 10-year Treasury yields hit their lowest point of the year before stabilizing and reclaiming 4.3% early today.
"The swoon in yields, which have lost about a quarter of a percentage point in just two weeks, has been exaggerated in part by nerves about another debt ceiling standoff ahead – which Federal Reserve officials have indicated may pause its ongoing balance sheet runoff of bonds."
This quote underscores the volatility surrounding bond yields and the implications for Federal Reserve policy.
"The bond market senses some trouble, with 10-year Treasury yields sliding to their lowest of the year on Wednesday before steadying and reclaiming 4.3% early today."
The market's response to potential economic challenges is evident in these yield movements.