Summary: Equity markets rolled over to the weak side after a choppy session yesterday, closing at a three-day low, in part as strong US economic data yesterday, especially the May ISM Manufacturing, boosted US treasury yields sharply. Treasury yields and US data will likely remain an important focus through tomorrow’s May US ISM services report as well as the May US payrolls and earnings numbers. An OPEC+ meeting today will test markets belief in whether Saudi Arabia and other OPEC members can boost production to compensate for reduced Russian supplies.
Nasdaq 100 futures continued lower yesterday erasing more of the recent rebound. This morning the futures are trading around the 12,550 level with yesterday’s low at 12,455 being the key level to watch on the downside. The ISM Manufacturing report for May was better than expected and Delta Air Lines ticket sales are back to pre-pandemic levels with the CEO saying that demand looks strong. On the flipside of these two positive indicators, Jamie Dimon (CEO at JPMorgan Chase) said the US economy is headed into an economic “hurricane”, but it was unsure of the severeness of the hurricane at this point in time.
The indices were down 1.8% and 0.1% respectively. Markets are muted over incremental stimulus measures. China’s State Council is providing the two state-owned policy banks with additional lending quota of RMB800 billion for the infrastructure sector. The amount is equivalent to about 21% of aggregate new bank loans for the infrastructure sector in 2021. The National Development & Reform Commission (NDRC) and eight other ministries and departments jointly released a development plan to boost investment in renewable energy.
USDJPY has rushed back higher, trading above 130.00 this morning, with the rally almost more aggressive than the rise in the coincident US treasury yields, underlining the ongoing sensitivity to the latter that will prove interesting to watch through the treasury market reaction to tomorrow’s key US data as discussed below. There is no ceiling for USDJPY as long as US long treasury yields are rushing higher unless the Bank of Japan is ready to climb down from its commitment to the yield-curve-control policy under which it caps the 10-year Japanese Government Bond yield at 0.25%. The nominal top in USDJPY for the cycle is 131.35.
The US dollar pulled back higher yesterday, showing once again a sensitivity to the direction in US treasury yields, which were also sharply higher on the day. AUDUSD peaked out yesterday above 0.7220 and a bit shy of the major resistance near 0.7260 and was trading 0.7150 as of this writing, a hook for newfound bears to get involved for a move back lower if the US dollar is set to rally further on a rush higher in US treasury yields (see discussion of this risk below). First major key lower is that huge 0.7000 demarcation line that has featured since well back into 2019.
Bitcoin slipped below the USD 30k level overnight, following the moves in the equity market. Also, the revenue for Bitcoin miners is at eleven-month low, but the activity of the miners has not gone down, despite the lower profits.
All eyes on the OPEC+ meeting today, after oil prices were smashed down from local highs at the start of this week on the story that OPEC is ready to boot Russian production levels from its quotas, theoretically paving the way for Saudi Arabia and possibly UAE to increase production. But do they really have the extra capacity they claim? US weekly DoE oil and product inventories data are also in the spotlight today, with 112.00 looking pivotal for the August Brent contract and the 110.00 area in July WTI.
An interesting day for gold yesterday, as the precious metal jumped off the lows despite US yields and the USD rising sharply yesterday, in part in the wake of strong economic data. Gold versus the euro rose very sharply from just ahead of the 1700 EUR/ounce area that was the support back in late March and posted an outside day reversal. It is an interesting development in the face of unsupportive developments, but the price action needs to pull back above at least the 1866 area pivot in XAUUSD and really above 1900 to suggest more bullish momentum is building again.
See thoughts below on whether US treasury yields are set to run higher. The first key is perhaps the 3.00% level in the US 10-year treasury benchmark, but the cycle high back in early May was near the 2018 highs of 3.26% If yields run above that level, it would be the first 10-year+ high in that benchmark since 1981.
The Bank of Canada was universally expected to hike the policy rate 50 basis points to take the rate to 1.50%, but the guidance got a hawkish upgrade yesterday as the end of the Bank of Canada’s policy statement said that the bank is “prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.” Does this mean potential rate hikes of greater than 50 basis points? Short Canadian rates rose sharply on the news, with the market pricing the BoC now for a policy rate closer to 3.00% than 2.75% by year-end. USDCAD spilled lower through and well below its 200-day moving average near 1.2660, but trade back above that level this morning.
The US ISM manufacturing headline rose to 56.1 in May from 55.4, far better than expectations of a decline to 54.5. However, the employment sub-index was disappointing, falling beneath the 50.0 neutral mark to 49.6. That makes the job data out this week from ADP and NFP more interesting. While momentum is set to slow, given expectations of 325k in NFP vs. 500k odd at the start of the year wage growth remains key.
Fed's Bullard, who is undoubtedly the most hawkish Fed member, has urged other FOMC members to move to 3.5% this year. This comes after Fed’s Bostic yesterday said that he didn’t suggest a Fed put with his comments last week which led to a September pause started to get priced in.
ECB’s Holzmann was more vocal yesterday about the potential 50bps rate hike to be considered, after Eurozone inflation reached record highs in May. While we are now getting into a quiet period ahead of the June meeting next week, the ECB rhetoric is likely to shift to a more hawkish stance thereafter ahead of key Q3 meetings, with July widely believed to be the “liftoff” meeting. EURUSD has plummeted back below 1.0660 and support at 1.0640 is the next focus ahead of the US payrolls and earnings data tomorrow.
This was mentioned yesterday at a conference, though he does say that business demand for travel has a long way to go to recover from the pandemic.
This is an extension of our thoughts from yesterday, that global markets could be pivoting again here after the consolidation lower in US treasury yields – the most important benchmark for the “price of global money (USD)” proved very modest from the top earlier in the month. Yesterday’s far stronger than expected ISM Manufacturing was one data point that helped treasury yields back higher, as well perhaps as the de facto start of Fed balance sheet reduction, or quantitative tightening, which started yesterday. The key data points through tomorrow that will establish whether for example the US 10-year treasury yield benchmark is set for a new peak above the recent 3.2% high (and thus high since 2018) as soon as next week are the May US payrolls and earnings report tomorrow, together with the May ISM Services survey up 90 minutes thereafter. Today we get the May US ADP private payrolls change, although the market is sometimes uncertain on whether to trust this data point for reaction. Fresh highs in yields could put fresh pressure on global equity markets after their recent strong consolidation off the lows.
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