US Treasury Yields Surge, Dollar Gains Strength Amid Positive Economic Data

The steep increase in yields of US Treasury bonds across all maturities triggered a correction in the US dollar's value this week. The US currency index tested the resistance level near 102.50 yesterday and continued its upward trend on Wednesday:The price remains within a downtrend corridor but is vigorously growing due to surprises in US economic data. Strong US GDP growth in the second quarter and a surge in US durable goods orders in July, a sensitive indicator of household income expectations, prompted a reassessment of the chances of another Federal Reserve rate hike and a scenario of a soft landing for the US economy after a period of high inflation caused by post-pandemic fiscal and monetary stimulus. BofA reported in its latest analytical report that the US economy can indeed “land” successfully, based on positive incoming data. Additionally, the agency Fitch stated that it expects another Federal Reserve rate hike to 5.75%. Interestingly, the agency also downgraded the long-term rating of the US by one level, citing decreased investor confidence in US debt due to issues in fiscal management, especially political standoffs over raising the debt ceiling, which are sometimes resolved at the last minute.The rising risk-free rates (i.e., bond YTMs) are putting pressure on the stock market. On the one hand, it increases the cost of capital for companies, limiting their growth prospects. On the other hand, the present value of stock prices, which is the sum of expected cash flows discounted to the present moment, decreases due to the rising discount rate. The S&P 500 and Nasdaq indices closed slightly down yesterday, while the DOW closed in positive territory. However, today, the futures on the indices are in the red zone. The same can be said for European markets, where the main indices are decreasing, but losses are capped to 1%. The sell-off of US Treasury bonds slowed down somewhat after the release of JOLTS data and the ISM Manufacturing PMI. The number of job openings in July decreased to 9.58 million, slightly below the forecast of 9.61 million. An increase in the number of job openings indicates an excess demand for labor, while a decrease indicates a balance between demand and supply. Labor market imbalances directly impact wage inflation, which, in turn, affects consumer inflation through increased firm costs and higher consumer spending. The lower-than-expected JOLTS figure reduced concerns about potential labor market-driven inflation. It's worth noting that, except for the April spike, the labor market has been normalizing since the beginning of this year:On the other hand, the Manufacturing PMI index did not meet expectations; the decline in activity slowed down but not as quickly as expected, with the corresponding index reaching 46.4 points against the forecast of 46.8 points. Weekly API data also indicated the potential for expansion in the US economy: crude oil inventories decreased by 15 million barrels, compared to the forecast of 0.9 million barrels. The reduction in stockpiles suggests increased demand for crude oil from refineries, signaling higher consumption from end consumers or such expectations from refineries.Today, we are expecting the ADP report on the US labor market, tomorrow – the ISM Services PMI (which employs over 70% of the US workforce), and on Friday – the NFP report on unemployment. Considering that the market currently attaches a small probability to another Federal Reserve rate hike, strong data could significantly strengthen the dollar. From a technical standpoint, the short-term target for dollar buyers could be the 103-103.50 area on the dollar index, which corresponds to the upper boundary of the current bearish channel.