Though US inflation may have finally peaked and recession fears are rising, US Treasury yields have bounced this week from 2.70% to over 2.90%. We thus think it is too soon to call a peak in Treasury yields or the USD.
Source: Bank of Singapore, Bloomberg.
First, the US recovery from the pandemic remains resilient. Overnight, May’s manufacturing ISM survey - a key US indicator - surprisingly rose from 55.4 in April to 56.1 last month as the first chart shows, allaying fears the economy is set to slow sharply as the Federal Reserve hikes interest rates.
Second, global economic data shows strength too. May’s Eurozone inflation hit a record high of 8.1% as the second chart shows. Even excluding energy and food costs, core inflation was 3.8%.
Source: Bank of Singapore, Bloomberg.
Similarly, China’s official purchasing manager indices (PMIs) signalled business sentiment rebounding as Shanghai reopens. The last chart shows services PMI jumped from 41.9 to 47.8 in May and manufacturing PMI rose to 49.6.
Source: Bank of Singapore, Bloomberg.
Third, central banks remain hawkish. Overnight, the Bank of Canada hiked rates 50bps to 1.50% and said it is ‘prepared to act more forcefully’.
We expect government bond yields globally will stay volatile over the summer. 10Y US Treasury yields traded in a 2.70-3.20% range in May, and we don’t rule out fresh highs as the Fed keeps lifting interest rates by 50bps in June and July. We thus remain USD bulls and see the EUR trading below this year’s five-year lows of 1.03.
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