One Step Closer to Debt Ceiling Deal – And a Fed Hike

The holiday shortened trading week starts tense but on an optimistic note as US President Joe Biden and House Speaker Kevin McCarthy finally reached an agreement to raise the debt ceiling. The deal must get approval in a congressional vote on Wednesday.

Yields Decline as a Deal on US Debt Ceiling is Getting Closer

The UK and US markets were closed yesterday, but in the European markets bond yields declined and the curve flattened from the long end. Spreads between the core-EU and periphery were stable despite the Spanish government calling a snap election for 30 July after losing in the local elections.

Dollar Overbought and Vulnerable to a Pullback

The dollar continues to rally, having gained around 3.4% from its early May lows, and has hovered around 104.2 for the past four trading sessions. The dollar is in locally overbought territory against a basket of major currencies, the euro and the yen.

Sunset Market Commentary

Germany, France and Italy are all due tomorrow and make up some 65% of the HICP basket. The Spanish number nevertheless set the tone for core bonds today.

Could a Strong Inflation Print Reignite Hawkish RBA Expectations?

A week before the monthly RBA meeting and the aussie is trying to recover some of its recent losses. For this tendency to accelerate, it needs a good set of data releases this week, and predominantly a stronger monthly CPI. However, the overall environment is not supportive of hawkish market repricings, making the aussie bulls’ task even tougher.

Dollar Turns to US Employment Report for More Fuel

The US dollar has been firing on all cylinders lately, capitalizing on bets that the Fed will raise rates one final time this summer. Yet, Fed officials seem split on whether more tightening is needed. This puts more emphasis on the upcoming nonfarm payrolls on Friday. Most signs point to another solid employment report, which could cement expectations of higher-for-longer rates and thereby, add fuel to the dollar’s recovery.  

Bond Yields Continue to Decline on the Back of Softer European Inflation Data

FI: Yesterday, global bond yields and interest rates continued to decline on the back of softer inflation data from the Euro area. Furthermore, there is also more certainty about a deal between the democrats and republicans regarding the debt ceiling. This has been supportive for US Treasuries and US T-bills. In the T-bill market, the yield on a June T-bill has declined from 6.5% to 5.30% over the past week.

What if Russia Didn't Follow OPEC's Output Cuts?

In energy, US crude tanked nearly 5% yesterday, and tipped a toe below the $69 pb mark on worries that Russia may not follow OPEC’s output cuts, in which case the internal conflict may prevent the cartel from reducing supply in a way to give a jolt to oil prices. There is little chance that we see the kind of discord like back in 2020, as the Ukrainian war strengthen the ties between two allies. But any Russian veto could materially reduce OPEC’s power of hit on oil prices.

China's Deflationary Spiral Bumps Up FX Risk Aversion

In stark contrast to the recent findings of China’s manufacturing sector survey done by China Beige Book, a US-based data provider that has indicated a rebound in manufacturing activities in May from April, the latest data released today on the official NBS Manufacturing PMI as well as the Non-Manufacturing PMI have showed another month of contraction and growth slowdown in May.

AUD/USD Slips on Soft Chinese PMIs, Aussie Inflation Jumps

Australian inflation rose in the first quarter, but the Australian dollar is considerably lower today due to soft China PMI reports. AUD/USD is trading at 0.6481, down 0.54%. Earlier, AUD/USD dropped as low as 0.6480, its lowest level since November 7th.