US dollar, T-yields slide post PCE data

The US dollar and Treasury yields retreated in May due to slowed consumer spending, but futures predict the Fed will resume raising interest rates next month to quell inflation. The core Personal Consumption Expenditures (PCE) price index fell to 4.6%, down from expectations of 4.7%.


The PCE index increased by 0.1% month over month. Households cut back on purchases of new light trucks and long-lasting manufactured goods amid higher borrowing costs, suggesting the US economy slowed in the second quarter and offset upbeat labor and housing market data in June. Yields pared sharp declines after the data’s release, with the short end of the curve edging up on expectations that policymakers will hike rates again at the end of their July 25-26 meeting.


The bond market is paying attention to Fed predictions of two additional rate hikes, but the data indicates it’s getting harder for consumers to keep up with growth. Without consumer demand to support GDP, more negative risks arise, and the Fed might not achieve that second raise. The yield curve, which compares the yields on two-year and ten-year notes, expanded by 105.5 basis points. An inverted yield curve is considered to be a highly reliable indicator of a coming recession.