Deutsche Bank analysts point out that stronger US data and hawkish Federal Reserve commentary have pushed Treasury yields higher and supported the Dollar Index. Inflation expectations and jobless claims surprised to the upside, while Fed officials signalled rates could stay on hold for quite some time and even rise if the Strait of Hormuz disruption persists.

Rates on hold narrative underpins Dollar

"And on top of the geopolitical headlines, we also had a hawkish batch of US data, with numbers on the labour market and inflation both surprising on the upside. For instance, the NY Fed’s latest survey showed 1yr inflation expectations up to 3.64% in April (vs. 3.5% expected), which is the highest since September 2023. So that raised expectations about a more hawkish response from the Fed. And that came on top of strong labour market data, with the weekly initial jobless claims at 200k in the week ending May 2 (vs. 205k expected), which took the 4-week moving average down to a two-year low of 203.25k."

"That hawkish newsflow continued with various Fed speakers. In particular, Boston Fed President Collins (a non-voter this year) said she agreed with the hawkish dissenters who didn’t want to include the easing bias in the statement. So that added to the sense there was wider scepticism around further rate cuts."

"We also heard from two of the hawkish dissenters. Cleveland Fed President Hammack said her own outlook was that “interest rates will be on hold for quite some time.” And Minneapolis President Kashkari said that “if the Strait of Hormuz is closed for an extended period of time, it may well be that the next move might need to be up in interest rates.”"

"So investors priced in a more hawkish outlook, with markets pricing a 38% chance of a rate hike by March 2027 at the close, up from 21% the previous day. And in turn, Treasury yields rose across the curve, with the 2yr yield (+4.6bps) up to 3.91%, whilst the 10yr yield (+3.8bps) rose to 4.39%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)