The US manufacturing ISM didn’t deliver the longed-for fireworks on markets. The headline number rose further from 60.7 to 61.2, but details continue to point to a worrisome cocktail for the Fed and the economy. Companies can’t keep up with red-hot demand because of still distorted international supply chains and because they can’t find enough/the right personnel. New orders rose from 64.3 to 67 while production (58.5 vs 62.5) and employment (50.9 v 55.1) both fell. The spread between backlog of orders (70.6 v 68.2) and customer inventories (28 v 28.4) is probably as wide as can be while supplier deliveries rose to the highest since 1974 (78.8). The prices paid component (88) remains sky-high. These combinations suggest a minority of Fed governors could be right in suggesting that short-term risks have become very inflationary while the US labor market could also be much tighter than suggested by the unemployment rate. Heavyweight Washington-Fed-based governor Brainard yesterday admitted that she is attentive to the risks on both sides. Up until now, she backed the Fed’s mainstream comments to keep a very soft stance in order to foster maximum employment while labeling the inflation overshoot as temporary. We believe that the June 16 FOMC meeting has a rising probability of becoming the starting point to talk about how to scale down some of the extraordinary support the Fed currently still provides (ie tapering the $120bn monthly purchases).
The post-ISM market reaction was stoic, both in FI and FX space. US Treasuries and the dollar were better bid going into the US close, but we blame fading stock market momentum for that. US stocks opened strong but fainted afterward. The S&P 500 approached the all-time high but failed to take it out. The Nasdaq shows a bearish engulfing pattern, pointing to a possible short-term trend reversal (lower). US yields added 0.5 bps to 1.1 bp across the curve in a daily perspective, but details showed a larger increase of inflation expectations (+3 bps) which near the panic-triggering 2.5% mark again. We follow this gauge closely and check whether investors manage to hold their nerve this time around. The German yield curve bear steepened with yields rising by up to 1.4 bps at the very long end of the curve. EUR/USD stood its ground north of 1.22, closing at 1.2213 from a 1.2227 open while sterling underperformed after cable ran into strong resistance (GBP/USD 1.4237 recovery high). The mirror move in EUR/GBP took the pair to 0.8632 even as BoE Cunliffe joined BoE Ramsden in a warning for an overheating UK housing market.
Today’s eco calendar is razor-thin, but we nevertheless keep a close eye on speeches by Fed governors and on the Fed Beige Book. More anecdotic evidence on developments described above strengthen the case for the Fed to start the tapering debate in June. US Treasuries and the dollar are exposed because of the inflation channel. The impact might be less outspoken if it also jitters general risk sentiment.
Brent oil prices topped $70/b in the wake of the OPE+ meeting. The oil-exporting cartel stuck to the plan of only gradually increasing output with a total amount of 2 million barrels over the May-June period. At the same time, OPEC+ acknowledged the “ongoing strengthening of market fundamentals, with oil demand showing clear signs of improvement”. It expects global oil inventories to be below the 2015-2019 average by the end of next month. The group is hesitant to ramp up output faster because it still sees “clouds on the horizon” for the oil market recovery.
Erdogan is back at it again. The Turkish president has been reshuffling central bank staff over the past few weeks,a move investors and the Turkish lira saw as writings on the wall already last week. EUR/TRY briefly spiked to yet another all-time-low beyond 10.7 before paring some of the gains to the 10.55 area late yesterday after Erdogan said he spoke to the CBRT governor. He urged him to lower rates despite inflation being higher than 17% with core measures expected even higher for May (18.2%, release tomorrow). The president said interest rates could fall already in the July-August period.