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As we are heading towards US rates tonight, while last week's political developments definitely pressured yields, we also believe all these technicalities played a crucial role in 10-year yields breaking below the 2.28-2.60% range that has held since last December.
Based on the prior behavior of yields after breaking through a well-defined range, as well as the upcoming political calendar, they expect that a modest move lower in yields from here should be contained to the next couple weeks and continue to call for higher yields as the fundamental backdrop remains supportive.
Furthermore, while our economists caution that the low US CPI print will likely give fuel to doves, they do not believe the one data point is enough to cause the Fed to deviate from its stated desire to gradually increase rates, and retain a call for a hike in June and September (we’ve recently seen a huge downside miss for CPI.
So while Fed Funds futures currently imply a 47% probability of a hike before the end of June (down from 57% at the end of March) we maintain our call for a hike in June and a rebound in yields leading to a forecast for the 10-yr yield to reach 2.70 by the end of the second quarter.
Finally on geopolitical risk, while very important from a safe haven demand perspective, given its unpredictability we take a cue from our asset allocation strategists that their approach is almost always to stick with the economic fundamentals and to accept politics as simply volatility that does not change the ultimate outcome.
Putting everything together, our baseline outlook for macro drivers in the coming months, particularly the outlook for US yields rebounding after near-term weakness, imply that while gold and silver prices could continue to be supported in the coming weeks they will likely adjust lower into the second half of this quarter ahead of a potential rate hike in June. From a trading recommendation perspective, we would look at higher prices from here as an opportunity to enter tactical short positions that would profit once some of the near-term risk fades.
