Yields Squeeze Dollar Bulls

The tumble in Treasury yields continued on Monday and began to take a toll on the US dollar as the Fed's Bullard shifted on his rates rhetoric. The greenback's tumble is also magnified by the 1.5% rise in gold--the biggest daily % change since late January. The Fed's Powell speaks Tuesday at 9:55 am Eastern (14:55 London) on what will be a closely-watched event. In the weekly video for the Premium subscribers (below), Ashraf highlights key "cyclical" developments in the Fed-Markets reflexivity layout and the existing trades, identifying the important implications for the June 19 FOMC meeting.

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The White House fanned the flames of protectionism more on Monday by removing a designation that helped India avoiding tariffs. A separate report said the President had considered tariffs on Australian metals. A weekend white paper from China also hinted at an unwillingness to back down to the US.

The S&P 500 fell 8 points but that doesn't tell whole story. Equities have benefitted from plunging rates and that's cushioned the fall. The severe worry is in rates as US 2-year yields fell another 9 bps to 1.83%. On May 22, they were at 2.26%. The Fed funds futures market is now pricing in a 50% chance of a rate cut at the July 31 FOMC meeting.

The market is hanging on signals about negotiations with China and Mexico but an economic toll is beginning to weigh. The ISM manufacturing index fell to 52.1 from 52.8 and is now at the lowest since October 2016.

The Fed's Bullard shifted further towards the dovish camp on Monday by saying a cut could be needed soon. Late last month he had said a cut could be needed before year-end, so he moved up the timeline. He also acknowledged the signals from the bond market.

The day ahead features a speech from Powell in Chicago. The topic is monetary policy strategy and communication and there is no Q&A so this may not be a market-moving speech. Yet, it would be a prime opportunity to crack open the door towards rate cuts. If so, the dollar will be primed for another day of selling as the crowded USD-short trade lightens up.