10-year bond yield and currency data from Bloomberg paint a quiet day in those markets. The GBP/USD stayed flat between 9:30 am to 4:15 pm with the rate going from 1.2686 to 1.2684. The EUR/USD was flat as well with ever so slight dollar weakening from 1.0847 to 1.0851 this afternoon. The Japanese yen demonstrated negligible strengthening with the USD/JPY going from 150.7100 to 150.6900.
Bloomberg data did not reflect much movement in German, U.S., UK, or Japanese 10-year yields. Over the 9:30 am to 4:17 pm timeframe, German bunds moved from 2.40% to 2.44%. U.S. ten-year bonds went from 4.26% this morning to 4.28% while UK 10-year gilts moved from 4.12% to 4.16%. The Japanese 10-years decided to skip the party altogether with no change in its 0.67% from this morning.
It is interesting but not surprising to me how the talk of an avalanche of cuts in 2024 has been reduced to what is relatively expected snow flurries. I recall expectations by some analysts for eight cuts during 2024 but now that expectation has dripped to two or three by year end. Now a minority of analysts see the possibility of rates moving higher thus in the favor of the dollar where an “America First” approach is pursued by the government.
In short, a rally in stock markets would attract more dollars to equities. Where the economy is strong accompanied by higher productivity growth and improvement in terms of trade, we should expect higher returns to capital.
Citing Brad Bechtel of Jefferies LLC, Bloomberg noted that a shift in expectations toward cutting rates later and at a lower level than first expected could boost the outlook for the U.S. dollar.
The Bloomberg analysis regarding the direction of rates is pretty contrarian given the expectation for a “Fed pivot”, but while the Federal Reserve System has a statutory mandate to maintain stable prices and full employment, I keep in mind that the Federal Reserve System is a backstop for the banking system, first and foremost. You open a bank account or buy shares in a bank, you expect the deposits that your money or shares are contained in to provide you with positive yield, income.
I never understood the mainstream media’s obsession with wanting to see the central banking system lower rates. They believe that lowering the rate at which large commercial banks lend each other their reserve funds overnight will spur growth. What lowered rates should do is encourage banks to lend outside of the overnight interbank market at rates exceeding the overnight rate. Whether lowered or raised, banks should be funding business models that provide the highest returns. Over the past fifteen years, banks have been funding losers.
Alton Drew
26 February 2024
Alton Drew 