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Tariff-Driven Inflation Bumps Fed Rate Cut Hopes—But at What Cost?
S&P Global’s flash PMI data showed May output improved across both services and manufacturing, with the latter climbing to 52.3—a three-month high. But this rebound is inventory-heavy, driven by front-loading ahead of expected tariff disruptions. Manufacturing input inventories posted a record surge, while supplier delivery times worsened to their lowest level since late 2022.
Price data painted an even sharper picture: manufacturing output prices jumped at their fastest pace since September 2022, while services hit their highest since April 2023. These inflation prints, directly tied to tariffs, are likely to reinforce the Fed’s higher-for-longer posture—at least in the near term. That’s lending some support to U.S. yields and, by extension, the dollar.
Foreign Demand for U.S. Assets Slips as Deficit Outlook Deteriorates
Yet that yield support has its limits. A poorly received 20-year bond auction and a ballooning deficit projection from Trump’s tax bill—estimated to add $3.8 trillion in debt—are weighing on sentiment. Foreign investors have begun scaling back exposure. The dollar’s dip to 142.80 yen earlier this week reflects this tension: rising yields aren’t proving attractive enough to offset deficit concerns and political risk.
Bond Market Risks Undermining Dollar Support
While 30-year Treasury yields tested the 2023 high of 5.17% before retreating, the bigger concern is that even elevated yields are failing to draw solid foreign demand. This disconnect is key: it signals that the usual relationship—where higher yields buoy the dollar—is breaking down in the face of structural selling pressure. The “Sell America” theme, fueled by weak auctions and credit downgrade risks, continues to ripple through forex markets.
Outlook: Dollar Needs a Clean Break Above 99.949—Or Risk Deeper Selling
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