Real yield differentials point to stronger USD

Though the relationship is far from perfect...

Chart of the Day

Following another sharp move yesterday, real 5-yr/5-yr yield differentials have moved in favor of the US in the past month. This chart shows the relationship between real yield differentials and EURUSD doesn’t always work, but that move could limit the euro’s upside or cause the USD to strengthen.


After surprising on the upside in January, eurozone core inflation fell to 1.1% - so nothing for the ECB to be too concerned about.

In Canada, GDP rose by 0.1% MoM in December, which took growth to -3.0% YoY. The leading indicator suggests growth should improve.

In Australia, GDP rose by 3.1% QoQ in Q4, which resulted in annual growth of -1.1%. The leading index implies growth will do very well in the quarters ahead.


The top indices all lost ground yesterday, although that means the S&P 500 and Russell 2000 have both been little changed in the past week.

Of the S&P 500 sectors, information technology performed worst and materials best yesterday.

The weakness of tech stocks was despite another fall in real yields.

The larger drop back in the 5-year real yield than the 5-yr/5-yr is because the inflation breakeven for the earlier period continues to rise, while that for the later period has dropped back - this is an unusual divergence and could be due to the Fed’s average inflation target.

Iron and copper prices have been rising back up again.

By contrast, the cryptos continue to weaken.

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