Dollar Index at 10-Month High as Yields on T-Notes Push Higher

Yesterday the Federal Reserve’s Neel Kashkari reiterated how the central bank still had more work to do on brining inflation back down to their 2% target. The President of the Federal Reserve Bank of Minneapolis suggested that the Fed would probably be required to raise rates and be prepared to hold them there for longer. Here, Kashkari sated that “If the economy is fundamentally much stronger than we realised, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off”. Following from the Fed’s interest rate decision last week and the release of the dot plot, Kashkari is understood to sit within the bloc of the FOMC which sees one more rate hike this year. Indeed, even Kashkari himself conceded that “I’m one of those folks” on the more hawkish side of the debate.

As we looked at last week, the Fed’s latest monetary policy meeting saw them maintain their benchmark policy target rate at 5.25-5.5% (its highest level in 22 years). Here, hawkish signals pervaded global financial markets given indications that there would be less rate cuts in 2024. Indeed, according to the release of the Fed’s Dot Plot, projections indicate the likelihood of another hike this year ahead of two cuts in 2024.

Hawkish signals from the Fed have been key driver behind the DXY appreciating to its highest level in 10-months. Indeed, this morning saw the dollar index surge north of 106, continuing the rally which has seen it rise from the mid-July lows of below 100.

The rise in the dollar index also comes as US treasury yields have pushed higher. Indeed, this month has seen yields on the US 10-Year appreciate more than 45bps, exceeding 4.5% for the first time since 2007. Meanwhile, yields on the US 2-year (which are generally more sensitive to shorter-term interest rate expectations) pushed north of 5.15% this morning, its highest level in 14 years. Here, the 2-year note is now out-yielding the S&P 500 by over 3.5%, its greatest level in 20 years.

Focus now turns to US consumer confidence released at 1500 this morning, as well as home sales data released at the same time. Here, markets will be looking at these figures for further insight into the health of the world’s largest economy.

According to the Chartered Institute for Personnel and Development (CIPD), the average number of sick days taken by staff has risen to 7.8 over the course of a year. This marks the highest number of sick days taken by staff in 10 years and is a sizeable increase from the 5.8 days taken before the pandemic. This also represents 3.4% of working time lost, per year. The CIPD also stated that “average absence levels remain considerably higher in the public sector (10.6 days per employee) than in other sectors, particularly private sector services (5.8 days), although the upsurge in average levels of absence is observed across all sectors.”

The study indicated that minor illnesses were the primary cause of short-term time off, followed by musculoskeletal injuries and mental ill health. The CIPD also stated that Covid-19 was the fourth largest cause of short-term absence in the workplace.

Last week we looked at how long-term sickness in the workforce was noted by the Institute for Public Policy Research (IPPR) as being a “serious fiscal threat”. The ONS indicated that there are some 2.6m people in the UK who are economically active due to long-term sickness – a marked increase from the pre-pandemic days when figures were not much over 2.1m. With long-term sickness levels now at record highs, according to the ONS this has added some 0.6% of GDP to the governments annual borrowing given the increase in welfare spending and the tax receipts forgone.