The US dollar is strong to start the week and to understand why, I think we have to go back to Friday.
1) ISM manufacturing
Today’s ISM manufacturing survey was on the hot side. The headline rose above expectations and the prices paid component climbed to 55.8 from 52.5. The market really wants to see some US economic weakness but it’s hard to find. I have written for a while that manufacturing is on a different track from services and that the sector had a recession in 2022-23 and bottomed out around August of last year so I’m not surprised but strength is strength.
2) SP Global US manufacturing PMI
This report painted a similar picture to the ISM manufacturing survey. Although it was below the 50 mark, the commentary suggested pricing pressure and that’s the opposite of what the market wants to hear.
3) Powell
This is the big one. Powell was incrementally more hawkish on Friday. He didn’t mention cutting rates this year (although he wasn’t asked) and said the Fed wasn’t in a hurry to cut rates. With that, pricing this year is down to 67 bps from 80 bps after the FOMC.
4) Calendar
It’s always tough to put too much weight into market moves at the turn of the calendar. There were rebalancing flows that may have suppressed yields last week and those could be reversing today as fund managers raise cash to invest in down the risk curve. And it’s not just any month, it’s quarter end plus, Japanese fiscal year end, and US tax filing deadlines are approaching. There are plenty of moving parts in play that are skewing the picture.
