Threat of Less Accomodative ECB Policy Drives Up U.S. Treasury Yields

The U.S. Dollar finished mixed against individual currencies on Wednesday, but lower against a basket of currencies heavily weighted by the Euro. Higher Treasury yields helped boost the Dollar/Yen. Optimism over the European Central Bank’s plan to announce the end of stimulus boosted the Euro. Increased appetite for risk and better-than-forecast Australian GDP drove the commodity-linked Australian and New Zealand Dollars higher.

June U.S. Dollar Index futures settled at 93.634, down 0.237 or -0.25%.

U.S. Economic Data

The news was positive across the board on Wednesday with solid performances in reports on Revised Nonfarm Productivity, Revised Unit Labor Costs and the Trade Balance.

U.S. worker productivity increased less than initially thought in the first quarter. The Labor Department said on Wednesday nonfarm productivity, which measures hourly output per worker, rose at a 0.4 percent annualized rate in the January-March quarter, instead of the 0.7 percent pace it reported last month.

Growth in revised unit labor costs rose 2.9% versus an estimate of 2.7%. This supported views that inflation pressures were steadily building up.

The U.S. trade deficit fell to a seven-month low in April as exports rose to a record high, lifted by an increase in shipments of industrial materials and soybeans. The Commerce Department said on Wednesday the trade gap dropped 2.1 percent to $46.2 billion, the smallest since September.

U.S. Treasury Markets

U.S. Treasury yields rose on Wednesday after the European Central Bank’s chief economist said the bank is set to discuss the end of its massive bond-buying program.

The threat of less accommodative monetary policy in Europe, in turn, helped spur a sell-off in American debt, driving yields higher since they move in opposite directions. The yield on the benchmark 10-year Treasury note was higher at around 2.97 percent, while the yield on the 30-year Treasury bond was also up at 3.125 percent.

U.S. Equity Markets

The major U.S. stock indexes surged on Wednesday with the blue chip and benchmark indexes driven higher by a strong performance in bank stocks which rose in reaction to rising U.S. interest rates.

Bank stocks, J.P. Morgan and Goldman Sachs were among the biggest contributors to the 346.41 gain in the Dow Jones Industrial Average. A 1.9 percent gain in the financials sector helped boost the S&P 500 Index 0.9 percent higher.

Tech stocks continued to perform well with the NASDAQ Composite closing 0.7 percent higher. While FANG stocks carried the market higher earlier in the week, it was the chipmakers that outperformed on Wednesday.

Gains may have been limited by a small loss in shares of Google-parent Alphabet which closed 0.4 percent lower. The catalyst behind the weakness was a report by the Financial Times which said the European Union was set to unveil a negative finding from a probe on Google.