Markets
Core bonds were back on offer at the final trading day of the month. US Treasuries underperformed German Bunds on a combination of hawkish Fed speech (Waller), better-than-expected economic data (Chicago PMI, Conference Board consumer confidence) and a general catch-up move after reopening from a long weekend. US yields added 8.1 bps to 10.9 bps with the belly underperforming the wings. Yields in Europe/Germany rose within a range of 5 and 7 bps across the curve, inspired by yet another record EMU inflation print (headline 8.1%, core 3.8% with strong monthly dynamics) for May. Action on bond markets set the tone for equities too. Europe and the US inched 1.36% and about 0.5% lower respectively. Oil prices surged initially by a little less than 3% following Europe’s ban on Russian imports, serving as a common factor pushing up yields further. But a WSJ article triggered a sharp intraday reversal of >4%. The report was about OPEC mulling to exempt Russia from its oil-production targets since the country hasn’t met its quota for several months now. If that were to happen, it could pave the way for the likes of Saudi Arabia and the UAE to pump up significantly more crude. The cartel has its monthly meeting tomorrow. The dollar profited from the marginal equity risk-off and rising yields. Some end-of-month rebalancing after the recent string of USD losses may have been at play too. EUR/USD erased the Monday gains to finish at 1.073. USD/JPY confirmed the bottoming out process with a sharp jump to 128.67. EUR/GBP had no clue what side to pick. The pair closed unchanged in the low 0.85 area.Stock markets in Asian dealings trade mixed. China underperforms after the private manufacturing PMI (48.1) rose less than the official readings had suggested a few days earlier. US bond yields extend their rise though on a more gradual basis. The 10y yield adds 2.5 bps, moving further away from important support at 2.72%. The dollar starts the new month on solid footing. EUR/USD inches further south towards the 1.07 big figure. We think current moves on bond and FX markets set the tone for the rest of the day. On the economic data front, the US kicks off an interesting remainder of the week with the manufacturing ISM (seen easing to 54.5) and JOLTS job openings today, followed by the ADP jobs report tomorrow and culminating on Friday with the official payrolls and the services ISM. The Fed’s monetary policy cycle starts tonight with the release of the Beige Book. Speeches by Lagarde, Lane and Knot all take place right before the quiet period ahead of the June 9 policy meeting begins. It is worth monitoring nevertheless.
News Headlines
The Australian economy performed well in the first quarter, growing by a bigger-than-expected 0.8% Q/Q and 3.3% Y/Y (was 3.6% Q/Q and 4.4% Y/Y in Q4 last year). Domestic demand was strong, with consumption adding 0.8ppts. Government expenditure also supported growth. The domestic performance was partially eroded by a negative contribution from net exports. The GDP price deflator printed at 2.9% Q/Q, the fastest pace since 1988. The combination of solid domestic demand and rising price pressures supports the case for the RBA to continue its hiking cycle after it raised its policy rate for the first time from 0.1% to 0.35% at the May meeting. Markets discount another 25 bps rate hike at the June 7 meeting. The 3-y Australian government bond yield jumps 8.5 bps this morning. The Aussie dollar is losing marginally (0.7165), but this is mainly due to overall USD strength.
