US data dump incoming, but markets remain focus on tomorrow’s Fed meeting

Some action was seen in Chinese financial markets overnight as region returned from a long weekend; Chinese stock markets fell (Hang Seng down 0.7% and Shanghai Comp down 0.9%) as equity traders their had their first opportunity to trade off of recent G7 and NATO developments (China received a hefty dose of criticism from the former and was classified as a systemic challenge by the latter), while industrial metal prices in the region also collapsed led by Copper (futures are currently down 4% in London trade, while the Bloomberg Industrial Metal subindex, BCOMIN, is down close to 3%) as Chinese traders had their first opportunity to react to weekend news that the country, the world’s largest copper consumer, may be about to release copper reserves to keep recent price rises in check.

Chinese/Asia Pacific markets aside, trade remains relatively subdued in most other markets. In pre-market open trade, US equity index futures are relatively flat albeit trading with a modestly positive bias, with E-mini S&P 500 futures still trading nearly bang on 4250 and Nasdaq 100 futures looking comfortably supported to the north of the 14K level, with the recent strong recovery in US tech stocks underpinned by recent weakness in US government bond yields. Speaking of US 10-year yields are flat in pre-market trade around the 1.50% mark, have recovered a little from last week’s dip to multi-month 1.45% lows but not showing too much by way of signs of a meaningful recovery back towards levels seen this time last month in between 1.60-70%. Tentative, indecisive trade seen in US pre-markets is not really too surprising ahead of a hefty dose of important US data releases today at 1330BST (May Retail Sales and PPI and the June NY Fed Manufacturing survey), followed by May Industrial Production numbers at 1415BST. But today’s heavy slate of data is unlikely to stir the pot too much, with traders likely to want to keep their powder dry/risk off of the table ahead of tomorrow’s all important FOMC rate decision (with the two-day FOMC meeting starting today).

In terms of commodities, the drop in industrial metals seems not to be having too much of an impact elsewhere; crude oil prices are still trading with a positive bias, with analysts pointing to the ongoing lack of progress in US/Iran nuclear deal talks (key sticking points reportedly remain) as a positive, as well as the positive backdrop of the global oil demand recovery narrative. There has also been lots of commentary from head honchos at various major oil companies at the FT Commodities and Global Summit, though nothing market moving. Aside from US data, the next major catalysts for oil markets are tonight’s weekly Private API inventory data out at 2130BST. Turning to precious metals; gold is flat this morning after yesterday’s choppy session that saw the precious metal at one point dropping all the way from $1880 to $1840, with technical selling seemingly exacerbating the choppiness (gold seemed to break below an uptrend that had acted as support since the end of March). Right now, spot prices are around $1860, about $60 below recent highs, weighed by the minor dollar recovery since the start of the month and also a reduction in inflation fears (as seen in lower inflation expectations versus recent weeks). But analysts note that expectations for a continued dovish tone on policy from the Fed as well as the likelihood that real yields will remain low ought to offer support to the precious metal going forward, so it may be a tough ask for the gold bears to push spot prices below the 200DMA (at $1840) and 50DMA (at $1820).

Turning now to FX; the US dollar is a tad stronger on the day and the DXY this morning pushed to fresh multi-month highs above 90.60. DXY is now testing its 50DMA (at 90.65) for the first time since mid-April. A clean break above recent highs ahead of today’s key US data and more importantly tomorrow’s Fed meeting seems unlikely, but after those risk events are cleared, markets may take this as a green light for further gains. On the day, EUR, JPY, CHF, SEK and NOK are all flat versus the buck, with EURUSD holding just above recent lows around 1.2100, USDJPY holding close to 110.00 after reclaiming the level yesterday for the first time in over a week and USDCHF close to the centre of recent ranges around 0.9000. Political turbulence in Japan (PM Suga’s ruling coalition faces a no-confidence vote submitted by the opposition, though they are likely to win) has hardly impacted the yen, updated Swiss SECO forecasts for GDP growth and inflation (which were mixed) have hardly impacted the Swissie and the euro is unfazed by ECB Chief Economist Lane unsurprisingly throwing his support behind the bank’s recent decision not to slow the rate of PEPP purchases just yet.

Turning to the G10 underperformers, NZD and AUD are each down between 0.1-0.2% on the day versus the buck, while CAD is down closer to 0.4% and GBP is the worst performer down over 0.5%. NZDUSD is probing recent multi-week lows under 0.7150, AUDUSD is flirting with a break below 0.7700, GBPUSD just broke out to print fresh multi-week lows under 1.4050 (technical selling appears to be one reason for sterling’s underperformance) and USDCAD at multi-week highs in the upper 1.2100s. Profit taking ahead of tomorrow’s key Canadian CPI release for the month of May seems to be weighing on the Loonie, though downside in industrial metals also seems to be hurting the currency, as is the case with the Aussie (remember both countries are key industrial metal exporters). A dovish tone to last night’s RBA minutes release is also being touted as weighing on the Australian dollar; the RBA board agreed in its last meeting that ending its QE programme in September (when the current AUD 100B remit is set to run out) would be premature and most analysts now expect the bank to announce some form of flexible QE at the July meeting. It appears that the Kiwi is nursing losses in sympathy with its Aussie counterpart, with perhaps some profit taking in action ahead of crucial current account and GDP data later in the week. Finally amongst the underperformers, aside from just technical selling upon a breakout to multi-week lows, GBP also seems to be feeling the weight of yesterday’s confirmation from the UK PM of a four-week delay to the country’s final reopening stage amid concerns about the spread of the Covid-19 delta variant. However, recent data form Public Health England on the efficacy of vaccines against the variant ought to instil some confidence that this next wave is not going to see Brits dying in droves as was the case in the Q1 winter wave.

There are a few other relevant economic updates for the UK this morning, both a little more positive than the above news, but neither really impacting GBP; firstly, the UK is set to announce a new trade deal with Australia today – this is unlikely to provide a meaningful boost to UK growth given that trade as a percentage of GDP between the two countries is relatively small. Secondly, we had UK jobs data this morning; the data was solid, with the unemployment rate dropping to 4.7% in April from 4.8% in March as expected, the economy adding 113K jobs in the three months to April (despite strict lockdown during much of that time) and the YoY rate of wage growth over the last three months as of April stood at a lofty 5.6%, which some analysts have argued will feed fears of labour shortages, though others point out that with total employment still well below pre-pandemic levels, plenty of labour market slack remains. The most forward-looking component of the report, the claimant count data for May, was also positive, showing a 92.6K drop in unemployment benefit claimants, while HMRC PAYE employment enrolment data (i.e. for taxation purposes) rose nearly 200K in May – in other words, we are now expecting May jobs data to be very strong in the UK. “The data released today paint a picture of a labour market well on its way to recovery” concludes Capital Economics. Not enough to save GBP from sitting at the bottom of the G10 performance table on Tuesday, however.

The Day Ahead

As noted, a data dump in the US at 1330BST is the key moment of the day. May Retail Sales (expected to show a 0.8% MoM drop in headline spending) and PPI (expected to show another 0.6% MoM headline price increase) will be the most important reports to watch, but the more forward-looking NY Fed Manufacturing survey for the month of June, whose headline index is expected to moderate slightly to 23.00 from 24.30 in May, will also be worth watching as an early read on manufacturing performance in the US this month. Inflation concerns have eased as of late, but markets might remain a tad jumpy if today’s PPI report shows signs of more persistent inflation (i.e. signs that elevated inflation could last into 2022, thus undermining the Fed’s transitory argument). US consumer spending remains way above pre-pandemic levels thanks to the tonne of stimulus in the US over the last 18 months, so even a bad number will not be taken as an indication of long-term bad US consumer health.

Ahead of the main US data releases at 1330BST, BoE Governor Bailey will be speaking at 1315BST, at which time Canadian Housing Starts data for the month of May will also be released. Other key data releases to watch today will be US Industrial Production numbers (for May) at 1415BST and US NAHB Housing Market Index (June) data at 1500BST. Finally, US bond traders will be on notice for a 20-yea auction at 1800BST and crude oil traders will be looking out for weekly Private API crude oil inventory numbers out at just after 2130BST.