The US dollar is mixed today after the Dollar Index rose to new 2018 highs yesterday. It is being driven by rising US rates, which also punishes short dollar positions. The US 10-year yield rose seven basis points yesterday to nearly 3.10%. It is consolidating near 3.06% now. Many see the yield rising toward 3.20%, which would match the mid-2011 high.

The two-year yield continues to march higher as well. It rose three basis points yesterday to 2.57% and is flat today. Part of the rise at the short-end reflects expectations about the trajectory of Fed policy. For example, if the Fed were to hike rates three more times this year, it would put the average effective rate for Fed funds near 2.45% (allowing the Fed funds rate to trade as it is now at the firm end of the target range). The implied yield on the January contract is 2.3055%. This implies about a 42% chance of a fourth hike this year. That is nearly double the odds before the April jobs data that kicked off this months reports. The implied yield has risen six basis points this month. The two-year note yield has risen by nine basis points during the same time.

This is to say a good part of the backing up of short-term rates is a function of rising confidence of the Fed's course. At the start of the week, we suggested that the rise in the US-German interest rate differential could be explained by the diverging inflation performances in recent months. There was nothing particularly worrisome in the yesterday's April retail sales report, but the components used for GDP purposes was firm at 0.4% following the upward revision in the March series to 0.5%. The Empire Manufacturing Index also was reported at the same time and was stronger than expected. We argue that the Federal Reserve more than other major central banks can look through practically any soft high-frequency data and be confident that its mandates can be achieved. They are within spitting distance now, and there is the large fiscal stimulus in the pipeline.