Feb 20 / Victor Arduin

Macroeconomics Weekly Report - 2024 02 20

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US Inflation Surprise Increases Risk Aversion

  • Last week was marked by a rise in US inflation data, which contributed to the strengthening of the US dollar, due to the scenario of greater risk aversion.
  • US Treasury bond yields continue to rise, reaching levels not seen since mid-December, when expectations of an interest rate cut in the first quarter of 2024 were gaining momentum.
  • These movements can be seen on a broader scale, such as in the commodities market, which reflects a more bearish sentiment due to the stronger dollar and the risks of lower demand in the future.


Last week, the US Treasury bond market was in turmoil due to inflation data, which exceeded expectations, increasing risk aversion. The upward surprise, especially in the services sector, reinforces the idea that there is still some way to go to reach the 2% inflation target.

Looking at the macroeconomic scenario, with a resilient labor market and strong economic activity, there is a growing feeling that interest rates will remain high for longer, something that has an impact not only on the US sovereign bond market, but also on the commodities market.

Image 1: USA - Inflation (%)

Source: Bureau of Labor Statistics         

Image 2: USA - Yield on US Treasury Notes (%)

Source: Refinitiv

Where are US Treasuries going?

The level of interest rates in the United States has a broad impact on the world economy, as the US dollar is the world's main reserve currency. For this reason, the market is eagerly awaiting interest rate cuts from the Fed. However, positive employment data and the country's recent inflation figures, which registered 3.1% in January, indicate that the economy can live with the current restrictive monetary policy for longer. Therefore, we shouldn't see an easing of borrowing costs before June.

As the market's perception that interest rates will remain high for longer increases, US treasury yields have reacted, gaining strength in recent weeks. For example, the 2-year benchmark (2A T-Note) closed last Friday, February 16, at 4.65%, up 0.16 (+3.74%). This level hasn't been seen since mid-December, when many market bets took an interest rate cut in March 2024 for granted.

Image 3: DXY Index

Source: Refinitiv

If, on the one hand, high interest rates in the world's largest economy are worrying because they make it difficult to access credit and reduce consumption, they are also worrying emerging countries and making them apprehensive, especially commodity exporters. As these products are generally traded in dollars, the strengthening of the American currency makes them more expensive, resulting in downward pressure on this market

The influence of market movements can be seen in the DXY, an index that tracks the performance of the dollar, which is up 2.96% (+2.92%) so far in 2024, and the BBG Commodities, an index that monitors the appreciation or devaluation of commodities, which is down 2.39% (-2.43%) this year. Thus, much of the ground gained by commodities since the end of last year is being lost, reflecting higher interest rates for a longer period than initially forecast.

Image 4: BBG Commodities Index

Source: Refinitiv

In Summary

The interest rate cut in the United States will take place sooner or later this year, but robust data from the American economy is delaying this initial move.

As the Fed fails to reduce the country's borrowing costs, the premiums on US treasury bonds are rising, as are the fundamentals of the stronger dollar against other currencies.

Meanwhile, commodities continue to face an adverse scenario, marked by the strength of the US dollar, reduced demand and the risk of recession, although the latter is much reduced, it still persists amid a very restrictive monetary scenario.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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