The topic de jour in markets over the last couple of weeks has been the disconnect between US Treasury yields and the dollar.
Typically, higher yields should attract foreign capital, pushing the dollar up – but over the last few weeks the dollar has veered sharply below the level expected by yields. This gap likely implies a vote of no confidence – if tariffs and one-sided trade policies undermine trust in US stewardship, investors may question the safety of dollar-denominated bonds and other assets, causing the dollar to fall despite the rising yields. Announced tariffs may eventually be rolled back, but the hit to confidence from sudden policy shifts is less easily reversed.
To draw further parallels between recent market movements and the Liz Truss mini-budget: in 2022, UK gilt yields spiked, sterling plunged to record lows, and a leadership shake-up quickly followed. Yet, once confidence stabilised, the pound recovered even as gilt yields remained under pressure. Fast-forward to the situation in the US today, the dollar, buoyed by a larger economy and deeper financial markets, has more cushion than sterling ever did, but a similar dynamic applies – rising yields and a weakening currency. The Truss example shows that a crisis needn’t be permanent, but until trust is fully restored, that yield-currency relationship may stay out of sync. In other words, as long as investors suspect the US could unilaterally upend policy, the dollar may continue to eschew its traditional relationship with yields.
UK cuts are on the way
Since ‘Liberation day’, markets have ramped up their bets on BoE easing by almost another full percent (88 basis points, or 0.88%) by the end of the year. US tariff spillovers are threatening growth in our highly open economy, and BoE governor Andrew Bailey has warned that trade-war risks must be taken “very seriously”. At the same time, softer inflation data (CPI easing toward the BoE’s 2% target last week) has cemented the view that faster cuts lie ahead.
According to swaps markets, two 0.25% cuts are expected by the end of June, with a further by September and a final cut in December, with an expected terminal 2025 rate of 3.5%.
Musk’s woes
Tesla reported earnings this week, which brought some small measure of relief for investors. The company’s shares have fallen more than 50% from their December peak, as a convergence of operational stumbles and brand backlash eroded investor faith.
In Q1, deliveries plunged 13% to their weakest level in nearly three years. Customers delayed purchases ahead of a Model Y refresh and balked at growing competition from BYD and legacy automakers, while sales were also hit by protests and vandalism linked to Musk’s political forays in the Trump White House.
On Wednesday, Musk confirmed he would cut his government commitment to just one or two days a week to focus on Tesla, a move greeted by a 5.5% after-hours bounce. Betting markets now put very high odds on Musk stepping back more permanently from his Trump advisory role, with an over 60% chance of him leaving the White House by the end of the year.
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