Equities remained stalled near all-time highs, looking ahead to key events tonight - the US inflation report and the ECB meeting. The S&P500 is unchanged, while bond yields and currencies experienced some intraday volatility, the AUD and NZD ending slightly lower. Interest rates: US 2yr treasury yields are unchanged at 0.15%, while the 10yr yield fell from 1.53% to 1.47% - a one-month low. The treasury auctions saw strong demand, partly a reflection of the large volume of cash in the system resulting from QE - traders lent surplus cash (via repos) in record volume to the Fed yesterday at 0.00% yield. Also interesting was traded 10yr inflation which fell to a two-month low of 2.33% on the eve of an important inflation report. Australian 3yr government bond yields (futures) fell from 0.19% to 0.17% via 0.16%, while the 10yr yield fell from 1.52% to 1.46% via 1.45%.
Commodities, Brent crude oil futures fell 0.3% to $72.02, copper fell 0.7%, and gold fell 0.2%, while iron ore rose 1.4% to $212.65.
Overnight Currency Ranges
AUD/USD 0.7724 0.7762
EUR/USD 1.2171 1.2218
GBP/USD 1.4110 1.4190
USD/JPY 109.23 109.65
NZD/USD 0.7167 0.7214
USD/CAD 1.2051 1.2118
USD/CNH 6.3822 6.4014
AUD/JPY 84.67 84.84
AUD/NZD 1.0749 1.0776
Another quiet day in Asia with attention on this evenings events from the Northern Hemisphere.
Firstly to tonight’s ECB policy decision, where market expectations have recently shifted after several policymakers declared their opposition to reducing the pace of bond purchases under the PEPP. Some tapering could still happen, but even then it would only amount to a reversal of the accelerated pace used in Q2 , in our view. More importantly, it is extremely unlikely that the ECB reduces the ultimate size of this pandemic bond purchase programme, which should remain fixed at EUR 1.85trn. Still, the market expects President Lagarde’s rhetoric to turn a little more upbeat in the wake of stronger Euro-area PMIs and headline CPI returning to 2.0% y/y for the first time since 2018.
Later in the session, the release of US consumer price index for May should receive heightened attention after the upside surprise in April. Much of this was driven by outlier categories related to re-opening.
AUD/USD traded in a tight 0.7724/62 range overnight and all key technical levels remain in place. Offering interest still expected ahead of 0.7815 while downside support remains ahead of 0.7700 and again at 0.7650.
Event Risk Data Today
Australia: MI inflation expectations edged up in May, but still remain below pre-covid levels ahead of the June update.
New Zealand: Markets forecasting a 0.1% rise in May retail card spending. Looking through the swings in spending associated with changes in the Alert Level, the trend in spending has been flattening off. A key reason for this is the slowdown in population growth since the borders were closed. There has also been a change in the composition of spending. Since the outbreak of Covid, spending on durable items like household furnishings has been strong. That’s helped to offset the drag from reduced spending in the hospitality sector.
Euro Area: At its upcoming policy meeting, the ECB’s Governing Council will be cautious not to impede the recovery before it is in full swing. The Bank is likely to keep Pandemic Emergency Purchase Program (PEPP) buying elevated over the next quarter, possibly at the “significantly higher” pace of around EUR 18bn/week. Any talk of tapering is set to be delayed until later in the year, when the rebound has materialised.
US: The markets are looking for a 0.4% rise in the May CPI, a release that will be closely watched by markets. However, in coming months, we expect these price pressures to dissipate. Initial jobless claims should continue their downtrend in the week ended 5 June, with the market anticipating a further fall to 370k.