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US yields fall sharply as economic data turns sour

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7 July 2021

Written by
Matthew Ryan

Senior Market Analyst at Ebury, Chartered Financial Analyst. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Financial markets were jolted into life by some rather disappointing economic data across both sides of the
Atlantic on Tuesday.

ata out of Germany yesterday was rather underwhelming, with the stricter lockdown measures there
continuing to weigh on output. Factory orders for May unexpected declined by 3.7% after investors had eyed
5% expansion.

The ZEW economic sentiment index also fell well short of expectations (63.3 versus 75.2
consensus). US data fared little better, with the ISM services PMI dropping to 60.1 from 64.0. While this is still a healthy level, investors have become concerned that the recovery in the US economy may be losing steam,
and subsequently spent Tuesday afternoon pilling into the safe-havens at the expense of risk assets.
The US 10-year yield experienced one of the sharpest moves, dropping to 1.33% this morning from 1.45%. The
safe-haven dollar also rallied against all of its major peers, up close to half a percent during the course of
London trading against both the pound and the euro.

Figure 1: US 10-Year Treasury Yield (1 month)

Source: Refinitiv Datastream Date: 07/07/2021

This afternoon will be all about the FOMC’s minutes from its June meeting. The Fed was far less dovish than expected last month, opening the door to two rate hikes before the end of 2023. We will be looking closely for clues as to a possible timing for a tapering in the bank’s QE programme – we expect a formal announcement to come in September. It will also be interesting to see whether there are divisions within the committee regarding their view on US inflation. If a number of members voice concerns that the spike in prices may prove more sustained, then investors would ramp up bets in favour of rate hikes and the dollar would likely rally.