US consumer sentiment for May was 50.8, lower than the expected 53.4. April’s housing starts were also below predictions at 1.361 million, compared to the anticipated 1.365 million. Additionally, import prices increased by 0.1%, when a drop of 0.4% was expected. Japan was hesitant in trade talks with the US, and President Trump’s tax bill did not pass a House panel vote. The Baker Hughes US oil rig count fell by one, and the Federal Reserve announced plans to reduce its workforce by 10% in the coming years. In the markets, WTI crude oil rose by 88 cents to $62.50. US 10-year yields decreased by 2.3 basis points to 4.43%, while gold fell by $46 to $3193. The S&P 500 gained 0.6%, with the US dollar gaining strength and the Swiss franc weakening. The foreign exchange market was stable until data showed increasing inflation expectations, which shifted market dynamics and impacted yields. The US dollar strengthened, causing EUR/USD to drop from 1.1200 to 1.1131, and USD/JPY rose from 145.45 to 146.05. Though some sellers of the US dollar returned, their impact was limited. The trade war tensions seemed to lessen, quieting the markets while President Trump visited the Middle East. The consumer sentiment figure of 50.8 is concerning as it is close to historical lows. This suggests that households are cautious, despite strong job figures and rising stock markets. April’s housing starts were slightly off target, indicating that domestic demand may not be as strong as expected. The slight rise in import prices further complicates assumptions about continuing disinflation. Japan’s reluctance to engage in US bilateral trade agreements raises ongoing concerns about transpacific economic cooperation—an issue to keep an eye on for safe-haven investments. The tax bill’s failure in Congress highlights the political challenges of pushing through supply-side reforms in an election year, affecting Washington’s credibility and future action. The US oil rig count dropped by one, pointing to a slowdown in exploration growth amid softening energy demand and narrower refining margins. The Fed’s plan to cut its workforce by 10% reflects a move towards efficiency; however, it might signal a slower pace for balance sheet expansion and hiring, suggesting that monetary policy could become more neutral than previously indicated. In terms of market movements, WTI crude’s rise was modest, largely driven by short-covering and some demand. US Treasury yields fell slightly by 2.3 basis points to 4.43%, which may lead some to pull back from floating-rate exposure. Gold saw a significant decline to $3193, down $46, aligning with the dollar’s rise and increasing real yields. This has prompted options traders to consider lowering volatility expectations for gold. The S&P 500’s climb of 0.6% was steady, not frenzied, and led by rate-sensitive sectors rather than cyclical ones. This rally felt more like a defensive play, reflected in the support for the US dollar, which pushed EUR/USD down to around 1.1131. That’s a substantial drop, given the relative strength of the eurozone’s fundamentals recently. USD/JPY also rose to 146.05 as traders adjusted their inflation perceptions. This shift was triggered not by a speech or central bank surprise, but by a gradual rise in US inflation expectations found in the TIPS market. This affected breakevens and real yields, prompting traders to quickly reassess their positions. Although some attempted to bet against the dollar’s rise, these efforts were short-lived, and the demand for dollars remained strong. On the geopolitical front, trade tensions between Washington and Beijing have eased somewhat, and with Trump occupied in the Middle East, markets felt less pressure from potential tariff or sanctions disruptions. Consequently, volatility premiums have contracted. Looking ahead, we will carefully navigate year-end rate positioning, focusing on short-term volatility tied to key inflation indicators. While liquidity is good, sentiment remains fragile. We should wait for precise price confirmations before making adjustments in rates and FX, especially since options are undervalued compared to historical ranges.

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