Dollar and bond yields rise as US growth hits 2-year high
How the US economy changed during the third quarter of 2019
The dollar and Treasury yields are steadying, but US equities are edging lower, as stronger-than expected US GDP data raise concerns that the Federal Reserve may quicken the pace of interest rate rises.
It looks like the “Trumpflation trade”, for the greenback and Treasuries at least, is back on — albeit on a less frenetic basis than in recent weeks. A fresh reading of GDP data on Tuesday showed the US economy grew at an annualised rate of 3.2 per cent in the third quarter, beating expectations of 3 per cent. It is the fastest pace of expansion in two years and is adding to concerns that the world’s biggest economy has little spare capacity to absorb president-elect Donald Trump’s mooted $1tn tax cut and infrastructure-spending stimulus package.
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Treasury yields have resumed the rally that was sparked by Mr Trump’s election victory three weeks ago, as traders add to bets that the incoming Republican president’s policies will further boost growth, raise inflation expectations, and cause the Fed to accelerate the tightening of monetary policy. The US currency is trading more cautiously, however. The dollar index (DXY), which measures the buck against a basket of its peers, is fractionally firmer at 101.37, some way clear of the near 14-year high of 102.05 it hit last week.
The US 2-year bond yield, which is particularly sensitive to monetary policy expectations, is up 1 basis point to 1.12 per cent, eyeing the intraday 6-year high of 1.17 hit on Friday. The 10-year Treasury yield is up 2bp to 2.34 per cent, while the equivalent maturity German Bund yield is adding 4bp to 0.23 per cent.
US equities have also benefited of late by the prospect of Mr Trump’s policies lifting corporate earnings, but the latest rise in the bond yields and the dollar finds investors in cautious mood. Futures at one point indicated the S&P 500 may start Tuesday’s session with a 6 point gain, but the Wall Street barometer is barely changed at 2,2019, recovering none of Monday’s 12 point retreat from record levels.
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It is interesting to know how bonds and yields are influencing modern US economy. I’m looking forward to your future posts on this topic because I believe it’s only first part of the changes we’re now experiencing.