DBS Group Research economist Eugene Leow notes that U.S. Treasuries remained resilient despite headlines reporting that China is reducing exposure to U.S. government debt and increasing Japanese government bond yields. Leow argues that with more than two Fed rate cuts priced in by the end of 2026, U.S. dollar rates are already discounting softer NFP and retail sales, and he sees a confined response to upcoming U.S. CPI inflation because inflation is not yet an impediment to rate cuts.
DBS sees a confined impact of CPI on USD rates
“U.S. Treasuries shrugged off news that China has ordered banks to reduce exposure to U.S. government debt and pressure from rising JGB yields.”
“The focus returns to the key data released this week (retail sales today, 11th NFP and 13th CPI). At current yield levels (over two cuts calculated by the end of 2026), USD rates probably already include a slightly lower than consensus NFP print (consensus: 68,000) and retail sales (consensus: 0.4% m/m sa).”
“We do not think USD rates will react strongly to CPI data at the end of the week.”
“As we examine inflation findings for the coming year, we note that market participants expect relatively delicate sequential inflation over the coming six months (around 2% annualized). However, the second half of the year is priced for an annualized boost of 3.1%.
“The upshot is that inflation won’t prevent the Fed from lowering interest rates in the next few quarters, but it could drag on even further.”
(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)
