Today it has been mostly quiet in the forex market, owing to a lack of headlines during the session. There were no important economic releases, but there’s data coming up later today and during the week. The Dollar is holding steady overall after the advances the DXY index made yesterday, while equities are slipping lower today, with the mood being shaken by increasing bond rates.

The latter was more of a concern early today, with 10-year US Treasury yields briefly reaching 4.56% – their highest level since 2007 – before settling down around 4.50% as the FED remains hawkish on robust US consumer spending. Later today we will get the US CB Consumer Confidence and New Home Sales which will partly show the shape the US consumer is in. Tomorrow we have the Durable Goods Orders followed by Pending Home Sales on Thursday and the Revised UoM Consumer Sentiment, all of which show how the US consumer is feeling.

For the FED to maintain its higher-rate policy for an extended period of time, the US economy must be as strong as it is currently in the coming months. In that case, I would say that the most perplexing aspect of the US economy in the previous year has been the resiliency of the American consumer. But, is this going to change?

This is an excellent figure that illustrates how the pandemic savings in the United States are rapidly disappearing and have already done so for lower and middle-income households (the bottom 80%).

This might lead to lower spending in the coming months as people run out of extra funds to spend, particularly on  non-essential items. In the face of more restrained consumption and expenditure, companies will suffer, perhaps  leading to weaker labor market conditions. Don’t underestimate the potential chain reaction.

Essentially, the US consumer is the thread that connects everything for the Fed right now. If that unravels and the economy begins to deteriorate materially, the Fed will be in a state of turmoil in attempting to manage its higher for longer story. And the critical question today is how quickly, as pandemic savings run out, this will translate into material weakening in the US consumer. So far, we haven’t seen any indications of this, but it’s worth keeping an eye out for just in case.