USD rates have been fighting the Fed over the past few weeks after the 50bps cut. The latest set of data extends the trend of higher yields post the start of Fed easing in September. Retail sales came in at 0.4% MoM sa, firmer than consensus at 0.3%. Moreover, the ex-auto & gas and the control group figures were even more impressive, with both registering at 0.7% MoM. Worries about the US consumer running low on savings have proven unfounded. We also note that weather related disruptions appear to have largely eased with jobless claims dropping back to 241k, from 260k the week before. Against this backdrop, the Fed may have to inject a more hawkish tilt in their communication even as they continue easing. In contrast, the ECB has now pivoted to back-to-back cuts as ECB President Lagarde sounded a more dovish note.
We think that USD rates are likely to be buoyant heading into the US elections in early November. While the Fed has guided to a terminal rate of 3% in 2026, the market is now looking for a terminal rate of 3.5% in 2025 with risks of a rise in FFR in 2026. The pace of rate cuts (currently assumed to be 25bps per meeting) may also start to be questioned if data stays firm. Moreover, with Trump’s odds of being elected rising again, investors would have to factor in the scenario that a Trump presidency could lead to overheating in the US economy. As sentiment stays stable, we would reasonably expect 10Y UST yields to be supported at around 4%. Meanwhile, the curve bear steepened on account of better growth expectations. However, the 2Y/10Y at 10bps is probably close to neutral. Steepening plays might make sense closer to par.
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