Dollar regains ground

Higher bond yields, lower equities and a generally firmer dollar were the order of the day in markets yesterday. The euro and sterling retreated further against the US currency and are trading at around $1.0790 and $1.2690 respectively this morning, both around one cent or so off their intra-week highs on Wednesday. EURGBP remained under pressure, briefly dipping to around £0.8485 (its lowest level since August 2022), but is back up at £0.8505 this morning.

Government bond yields headed further north yesterday, with German and UK 10-year yields increasing by around 10bps and equivalent US yields up around 5bps. Rising yields seemed to weighed on equity markets, European stocks shedding almost 1.5% and the S&P 500 about 0.7% lower on the day.

Ahead of tomorrow’s inflation data for the Euro area, the annual rate of (HICP) inflation in Germany rose for a second consecutive month in May to 2.8% (a touch higher than the consensus forecast of 2.7%) from 2.4% in April, while Spanish inflation rose for a third month in a row to 3.8%, up from 3.4% last month.

The Fed’s latest Beige Book, which is based on contacts with businesses across the US, notes that retail spending was flat to up slightly over the period from early April to mid-May, “reflecting lower discretionary spending and heightened price sensitivity among consumers”. Employment is reported to have increased at a “slight pace overall”, while wage growth “was at pre-pandemic historical averages or was normalizing toward those rates”.

Fed member Bostic sees the fourth quarter of this year “as the time where we might actually think about and be prepared to reduce (interest) rates”, as inflation moves back gradually towards its 2% target.

Economic data due today include the Economic Sentiment Indicator for May in the Euro area and jobless claims and a second estimate of Q1 GDP in the US (the first estimate showed the pace of growth slowed to an annualised rate of 1.6% from 3.4% in the final quarter of 2023).