Dollar Rallies, Bond Yields Hit 5 Year High, Stock Market Plummets:What Does It Mean

[DailyFx]

Even though there was no major US economic data released today, we had very volatile price action in the financial markets. The Dow Jones was down 90 points in the first hour of trading then rebounded back to flat before selling off once again to end the day down almost 130 points.

Ten year bond yields also hit a 5 year high driving the US dollar up against the Euro and Japanese Yen. In fact, the yield curve is now pricing a slim chance of a rate hike over the next year. The price action in the three markets suggests that the bias is certainly skewed towards stronger numbers tomorrow morning as the US data calendar heats up significantly. We are expecting May retail sales and import prices, April business inventories, the Treasury?s report on FX manipulation as well as the Beige Book report. Record gasoline prices in late April, early May could boost gasoline receipts which are reflected in the overall value of retail sales. The weaker dollar on the other hand should drive import prices higher. Inventories are expected to rebound after a drop in March while China will mostly likely avoid being branded a currency manipulator given recent changes to monetary policy. Stronger economic data will only validate the Federal Reserve?s need to leave interest rate unchanged which is why the stock market is falling instead of rising. Stocks will need to fall much further before the Fed will consider lowering interest rates however.