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Markets doubt the economy will be strong enough for two Fed rate hikes this year

While weak U.S. data was a bigger factor, the Trump saga caught the interest of dollar and bond markets because traders worry any big distraction in Washington will slow down White House and congressional efforts on tax reform and fiscal stimulus.

The latest controversy added to the dollar’s decline and helped send bond yields lower. Yields move inversely to prices. Stocks, meanwhile, brushed off the events, and the Nasdaq rallied to a new record high at 6,169, up 20 points. Bank of America Merrill Lynch, meanwhile, released a survey Tuesday showing global fund managers see Nasdaq as the world’s most crowded long trade.

Stocks closed mixed, with the Dow off 2 at 20,979 and the S&P 500 down 1 point to 2,400.

The dollar index fell as the euro surged above 1.10 on an improving outlook for Europe. The dollar index was trading at 98.16 late Tuesday, a level last seen around Election Day.

“Europe is seeing an acceleration in economic activity, visible in both survey based and real economic statistics. Instead, in the US we are experiencing a deceleration, since the strength in survey based statistics (i.e. The soft data) is now rolling over and the real economic statistics failed to rebound,” wrote Alessio de Longis, portfolio manager at OppenheimerFunds Global Multi-Asset Group, in an email.

Jens Nordvig, CEO of Exante Data, said he sees the euro continuing to rise against the dollar.

“The dollar had a mega move from the summer of 2014 to just recently. That was a 25 percent move in the trade-weighted dollar. That was like a 1980s move. It’s not that the dollar is unattractive, it just went so far. I will be bearish dollar versus euro, specifically,” said Nordvig.

Nordvig said the Trump news weighed on the dollar but it was already moving lower on the same concerns that created doubts about the Fed rate hikes.

“Obviously, there’s some of this Washington concern,” said Nordvig. “We had lower inflation numbers. People are starting to doubt whether the Fed is going to go in June and September. Beyond all of this there’s a trend change in the euro.”

First-quarter growth was just 0.7 percent, but economists are forecasting a pickup to about 3 percent or more for the second quarter. Retail sales Friday were slightly weaker than expected, and housing starts Tuesday also disappointed. However, a positive was the jump in factory production, which was up 1 percent in April after declining 0.4 percent in March.

“The data in the first quarter, particularly March, was weak, and the market was expecting the April data to improve. While it’s improving, it’s not improving by as much as the market was expecting,” said Thanos Vamvakidis, head of global G-10 currency strategy at Bank of America Merrill Lynch.

Vamvakidis said the decline in odds for a June rate hike was surprising. “A week ago, it was a done deal. Now it’s not fully priced in,” he said. Market odds for September have fallen to about 40 percent from about 50 percent, he added.

On Wednesday, mortgage applications are released at 7 a.m. ET. The New York Fed releases a household debt and credit report at 11 a.m. ET.

Oil inventory data is released at 10:30 a.m.

Earnings are expected from Target, Tencent, and American Eagle Outfitters before the bell. Cisco, L Brands, Rexnord and ZTO Express report after the close.

Watch: Fed moves more important than fiscal policy

Market Insider

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