U.S. Dollar and Yields Rise With Probability of Four Fed Hikes

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    Helmholtz Watson

    The U.S. dollar and US Treasury yields continued…



    As core yields rise and the dollar strengthens, emerging markets with deepening current account deficits remain under pressure.

    YTD returns in EM credit and EM local markets now stand at -3.7% and -2.4%, respectively, while EM dedicated bond and equity funds had their worst week of outflows last week since the volatility spike in February


    Fed’s Mester speaking in Boersen Zeitung

    Markets are in-line with Fed rate expectations
    The difference between 2 or 3 more hikes this year is marginal for the economy
    If inflation does not pick up as expected, that’s an agreement to wait longer and be more cautious


    Highlights of Minutes of May 2 FOMC meeting

    Trade talks raised a ‘particularly wide’ range of risks
    Fed funds could reach neutral level ‘before too long’ if rate increases continued noted by a few
    Some Governors say it may soon be appropriate to change guidance
    Most saw little evidence of overheating of labor market with wage pressures ‘still moderate’
    A few cautioned that inflation expectations remained somewhat low
    Majority see firming of inflation providing ‘reassurance’ that 2% would be reached
    Some officials saw forward-guidance revisions appropriate soon
    ‘A few’ noted yield curve less reliable economic signal, while ‘several’ thought it remains important to watch as a recession warning
    Modest inflation overshoot ‘could be helpful’
    Most felt it would ‘soon be appropriate’ to hike should outlook remain intact


    Pres. of the Philadelphia Fed Harker

    Sees 3 hikes this year if inflation does not accelerate
    We are getting close to neutral rate
    Would not want to go far over the neutral rate
    Possible that 2019 end of tightening cycle
    Sees 3 hikes next year


    US 7 year note auction – $30B of at 2.930% vs. 2.935% WI

    Bid to cover at 2.62x vs 2.56x at the last auction – highest since January.
    12.9% to direct bidders – highest since February.
    65.5% to indirect bidders v 65.8% at the last auction.
    21.6% to primary dealers

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