Stronger for longer is the US dollar theme

<p>No one thought the US economy would be able to shrug off 5% rates this easily. It has been 20 years since the Fed funds rate was this high and the economy was drunk on easy money during the pandemic.</p><p>Yet even as the hangover kicks in, Americans are still showing up to work, and to shopping centers. </p><p>US GDP confounded economists with a 2.0% annualized growth rate in Q1 in the final report, compared to 1.4% expected. The change came on a big shift higher in net trade.</p><p>At the same time, weekly US jobless claims fell back to 239K from 264K in a sign that layoffs aren't materially rising and the jobs market remains tight. It will take at least a rise to 300K to get the employment market back into balance.</p><p>It all raises the question of how high the Fed will need to hike to tame inflation. The market now sees an 85% chance of a 25 bps hike in July and a nearly 50% chance of another hike in November.</p><p>Bonds sold off on the news with US 10-year yields up 11.7 bps to 3.82%. Shorter on the curve, US 2s are up 15 bps to 4.87%. In March, the front end hit 5.08% and we may be headed back there.</p><p>What's happening? There are certainly signs of weakness in other global economies but consumers are proving resilient. Earlier today, Australian retail sales rose 0.7% compared to 0.1% expected.</p><p>The market may have underestimated the power of fiscal stimulus, pent-up savings and house price growth. There are certainly people hurting due to higher mortgage rates but there may be a larger portion of home owners that have low mortgages balances and a windfall from housing wealth.</p><p>Governments also spent heavily on long-lead infrastructure in the US. That money is just beginning to be spent.</p><p>There are also the lags of monetary policy to take into account but a higher-for-longer scenario is increasingly believable — and a stronger for longer dollar along with it.</p>

This article was written by Adam Button at www.forexlive.com.