Dollar gains ground as bond yields pressure equities ahead of Trump-Xi meeting

The bond market continues to dominate trader attention this morning. The U.S. 10-year yield stands at 5.1226%, close to its highest point since 2007, while the 30-year yield has also risen. Strong U.S. business activity data from yesterday added to worries that the Federal Reserve may need to take further action to control inflation. Oil is also recovering, keeping the impact of energy costs on inflation in focus.

This combination is putting pressure on stocks before the U.S. market open. At 7:35 a.m. ET, futures pointed to:

• Dow industrial average: −178 points
• S&P 500: −38 points
• Nasdaq: −274 points

The dollar is stronger against all seven major currencies in the provided FX snapshot. The biggest move is versus the Japanese yen, with USDJPY rising 0.28% to 158.74. The dollar is up 0.23% against the Swiss franc and 0.09% against the Canadian dollar. EURUSD is down 0.04% to 1.1375, the smallest dollar move in the group. GBPUSD is down 0.07% to 1.3228, AUDUSD is down 0.08% to 0.7028, and NZDUSD is down 0.07% to 0.5669.

For traders, the currency picture is clear: the dollar holds the upper hand across the board, but the moves are uneven. USDJPY has displayed more momentum than EURUSD. That difference is important when turning to charts: a broad dollar bid does not mean every pair has broken a technical level or has the same room to run.

Yields and other markets

The Treasury curve is sending a mixed signal this morning. Shorter yields in the snapshot are lower on the day, while the 10- and 30-year yields are higher:

• 2-year: 4.8661%, −2.89 basis points
• 5-year: 4.9928%, −1.22 basis points
• 10-year: 5.1226%, +0.86 basis points
• 30-year: 5.4318%, +2.98 basis points

The rise in longer-dated yields extends beyond the U.S. Japan’s 10-year yield is around 3.08%, its highest since 1996. Germany’s is near 3.57%, its highest since 2009, while UK and French yields are near multi-year peaks. For stocks, higher long-term yields raise the discount rate applied to future earnings and can make borrowing more costly.

European stocks are mixed in the supplied snapshot:

• Germany’s DAX: −0.30%
• France’s CAC 40: −0.25%
• UK’s FTSE 100: +0.08%
• Spain’s IBEX 35: +0.33%
• Italy’s FTSE MIB: −0.34%

WTI crude is up 1.26% to $93.32 in the commodity snapshot. Gold is lower by about $24 to $4,263, silver is down 1.34% to $63.58, and Bitcoin is down 1.08% to $83,472. The simultaneous rise in oil and longer yields, along with lower stocks and precious metals, is worth monitoring as the North American session gets underway.

News and the North American calendar

The Swiss National Bank left its policy rate unchanged at 0% this morning. It said higher energy prices have lifted near-term inflation, but that medium-term inflation pressure has increased only slightly. The bank also maintained its readiness to be active in the foreign exchange market as needed.

Presidents Donald Trump and Xi Jinping are scheduled to meet today. The extension of the U.S.–China trade truce and any comments on trade or the Middle East could move markets, but traders will need to judge the actual announcements rather than assume a breakthrough before the meeting.

The planned U.S. events, with times converted to ET, include:

• 8:00 a.m.: Richmond Fed President Thomas Barkin speaks.
• 8:30 a.m.: Initial jobless claims are expected at 201,000, versus 196,000 previously. Continuing claims are expected at 1.750 million, versus 1.730 million previously.
• 8:30 a.m.: The second-quarter current-account deficit is expected at $255 billion, versus $226.8 billion previously.
• 8:50 a.m.: Cleveland Fed President Beth Hammack speaks.
• 10:00 a.m.: August new-home sales are expected at an annualized 620,000, versus 607,000 previously.
• 10:10 a.m.: Philadelphia Fed President Anna Paulson speaks.
• 1:00 p.m.: The Treasury auctions 7-year notes.

Jobless claims will be the first scheduled test of the morning's rate story. A weaker labor reading could challenge the recent move in yields; another firm reading could reinforce the view that the Fed has room to remain restrictive. The reaction in yields, the dollar and stocks will show how traders interpret the number.