Written Commentary
INTEREST RATE MARKET FUTURES
Futures are higher across the curve, with the 10-year yield holding steady around 4.4%. Treasuries have gained in recent days as soft inflation data has added to bets on interest-rate cuts from the Fed. Treasuries and German Bunds have rallied alongside equities and the euro in what could be a “liquidity-on” pattern that potentially suggests something dovish is happening. The softer inflation data is most likely behind the rally.
May and June will likely be when inflation pressures from tariffs become more evident in the economy as businesses run out of pre-tariff inventory. Recent inflation readings suggest that inflation was cooling before tariffs were implemented, although their impact has yet to be seen. Despite the cooler readings, the inflation outlook remains unclear against the backdrop of tariffs and likely did not change the Federal Reserve’s views on pausing rate cuts for the time being. Markets are currently anticipating two 25 bps cuts this year, with the first cut coming at the September meeting.
Fed Chair Jerome Powell in a speech Thursday morning said he expects the US to be entering a period of more frequent supply shocks and volatile inflation.
University of Michigan one- and five-year inflation expectations are due at 9:00 a.m. Central Time.
The spread between the two- and 10-year yields is 45 bps.
STOCK INDEX FUTURES
Indexes edged higher Friday as markets digested Thursday’s retail sales and inflation data. Monthly retail sales for April increased 0.1%, a sharp downturn from March’s increase of 1.7%, but ahead of expectations of no change. Economists were expecting a slowing of spending as consumers spent heavily on goods in March in anticipation of rising prices from tariffs.
President Donald Trump said on Friday that the US will set tariff rates for its trading partners within the coming weeks, saying the administration cannot create trade deals with all countries at once due to limited capacity. Meanwhile, negotiations with Japan and India are ongoing as both countries are considering dropping all tariffs on US products. Japan has reportedly been pushing for a full removal of the 25% tariffs on cars, with Tokyo saying it will not settle for a partial deal.
Walmart, the world’s largest company by revenue, warned of rising costs at stores due to the impact of tariffs. The company said that the price increases will be visible further into May, in what could be a look into the future inflationary impact of tariffs on consumers.
US housing starts were in line with expectations of 1.36 million starts on an annualized basis, an increase over the previous reading of 1.339. Despite the supportive reading, building permits fell 4.7% month-over-month for April as the construction industry braces for tariff headwinds.
The University of Michigan will release its consumer sentiment and consumer expectations at 9:00 a.m. Central Time.
CURRENCY FUTURES
The US dollar index continued its losses from Thursday into Friday after a softer-than-anticipated PPI report was bearish for the greenback. The June US dollar index has settled around the $100.6 level as an early rally at the beginning of the week fueled by the US-China trade agreement was dulled by soft CPI and PPI data.
The dollar has weakened against several Asian currencies like the Taiwan dollar and, more recently, the South Korean won. The weakness comes amid speculation that the Trump administration is advocating for a weaker dollar as a part of ongoing trade negotiations. The administration has argued that the dollar’s strength against weak Asian currencies has put US exporters at a disadvantage. Ongoing trade deals with Asian countries could lead to further dollar weakening.
Japan’s economy contracted 0.7% on an annualized basis in the first quarter, with a 0.2% quarter-over-quarter contraction. The Bank of Japan recently slashed its growth forecast for the year and said that tariffs are expected to hurt Japan’s exports and business investment. The data signals that the bank may have to wait to continue its tightening cycle. Japanese yen futures are little changed following the data.
Eurozone exports to the US surged by almost 60%, while exports to China fell around 10% as businesses looked to get ahead of tariff measures. June Euro futures are trading just above $1.21.
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