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Signs of US resilience lift dollar

The dollar is strengthening and Treasury yields are pushing higher after yesterday’s raft of second-tier data releases pointed to continued outperformance in the US economy relative to its rivals. 

Durable goods orders topped expectations in May, posting a 1.7 percent gain against a forecast -0.9 percent decline. New home sales jumped 12.2 percent, well above the predicted 1.2-percent gain. And consumer confidence surged, smashing market forecasts and suggesting that cooling inflation is intersecting with strong labour markets to bolster optimism about the economy’s direction. The Conference Board’s index jumped to 109.7, beating consensus estimates that were set closer to 102. An subindex measuring current conditions rose to a two-year high, and the six-month forecast gauge improved, even as inflation expectations fell to the lowest levels since 2020.

The Canadian dollar is back on the defensive after the Bank of Canada’s preferred inflation measures showed signs of cooling in May, reducing the impetus for more rate hikes. Headline price growth decelerated to its slowest pace since 2021, and the trimmed-mean and median core aggregates rose an average 3.85 percent year-over-year in the month, down from April’s upwardly-revised 4.25 percent as a range of categories softened.

Given current conditions, we think policymakers will opt to pause again in July, but inflation rates remain well above the Bank’s comfort zone, and two data releases in the coming days – tomorrow’s April jobs numbers and Friday’s gross domestic product print – could yet tilt the scales toward another rate increase. If the surprise March payrolls decline is reversed and the economy maintains momentum – as preliminary estimates suggest – policymakers may choose to counter overheating risks with more monetary tightening.

Australia’s dollar is also down on softer-than-anticipated inflation, with a pause at the Reserve Bank’s next meeting looking more likely after consumer prices rose 5.6 percent in May from a year earlier, the smallest increase since April 2022.

Today’s data calendar looks light: The US will publish wholesale inventories and trade balance numbers, and neither is generally considered likely to move markets. Weekly crude inventories will land later in the morning.

But four of the world’s most powerful central bankers are about to take their seats at an annual policy forum in Sintra, Portugal, and market participants will be monitoring three of them for any deviations from the “higher for longer” mantra that has come to dominate communications in recent months. Newly-minted Bank of Japan Governor Kazuo Ueda is likely to highlight differences in Japan’s situation, but Andrew Bailey, Christine Lagarde, and Jerome Powell will undoubtedly tell the audience that there is more to do on inflation and that there’s no “mission accomplished” signal in the offing.

If there is a communications misstep, we would suggest exercising caution in trading it – any market reaction could be short-lived and quickly reversed.

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