Here's a note from Bank of America yesterday:
April payrolls (175K) were lower than expected and April CPI (core: down to 3.6% y/y and 0.3% m/m) led the Fed to push its first rate cut from November to September . The yield on the 10-year US Treasury note fell from a peak of 4.7% on 04/25/24 to 4.35% today. Citi's Economic Surprise Index has changed significantly in recent weeks, with economic data showing clear signs of decline. At -21.6, the economic surprise index is approaching the most negative reading since January 2023. We believe the weak data is the long-awaited response to the tight monetary policy of the past few years and do not believe it is an anomaly. The soft landing scenario is beginning to unfold. A large discrepancy has emerged between the Citi Surprise Index and the 10-year UST yield, indicating a downside potential in the 10-year UST yield. Based on this divergence and technical analysis, we believe that a decline from 4.35% to the 3.25% area over the next 6-12 months is a good possibility – and likely not a consensus. We note that Bank of America's base rate forecast is 4.25% for the 10-year UST yield at the end of 2024 and 2025, suggesting a more modest period of increase.
Such a scenario would mitigate some of the recent strength seen in the US dollar, especially against the yen and Swiss franc. But how far this goes will depend on the severity of the slowdown.
This article was written by Adam Paton at www.forexlive.com.
