Markets no longer disregarded US eco data yesterday. Both May ADP employment and non-manufacturing ISM delivered consensus-beating outcomes. ADP recorded 978k job growth, surprising even the most bullish analyst. The non-manufacturing ISM rose from 62.7 to 64, a record in data going back to 1997. Unlike Tuesday’s manufacturing ISM, details mostly remained upbeat on the demand side. Business activity, new orders, and new export orders all increased and are all above the 60 marks. The setback in the employment (55.3 from 58.8) component was smaller than for manufacturing and the absolute level is higher still. Supply-side indicators continued to point at distorted production chains leading to significant price pressure. The data both confirm the bright eco outlook and a strong belief that the US QE tapering debate will start in June. Our base scenario includes winding down MBS purchasers (currently $40bn/month) in the second half of the year while US Treasuries ($80bn/month) will be kept for 2022. Several Fed governors already hinted in the direction that the US housing market actually doesn’t need this kind of support anymore. Markets reacted to the US eco data via the real interest rate channel. The US 10y real rate added 6 bps in a daily perspective. US (nominal) yields added 1.2 bps (2-yr) to 4.7 bps (5-yr) with the belly of the curve underperforming the wings. Inflation expectations declined by 2 bps. The German yield curve steepened in a daily perspective with yield changes ranging between -0.5 bps (2-yr) and +1.6 bps (30-yr).
The jump in US real rates finally gave some reprieve for the US dollar. The trade-weighted greenback surged from 89.89 to 90.51, breaking out a narrow sideways range since mid-May. The analysis for EUR/USD is similar with the pair sliding from 1.2211 to 1.2118. Dollar strength and relatively soft US Treasuries remain a theme this morning. Yesterday’s eco data (with also weekly jobless claims at a 385k cycle low) suggest that today’s May payrolls report will make up for last month’s huge disappointment. Even if the correlation with ADP isn’t that strong as it once used to be, a back-of-the-envelope calculation suggests room for a huge upward surprise. April ADP beat April payrolls by a 400k margin while yesterday’s ADP outcome beat consensus by over 300k. The combination suggests that the 674k consensus for today could easily be beaten. If so, it would confirm trends witnessed yesterday while convincing the remaining, more dovish, Fed governors that the time is right to start the tapering debate. Technically, the first intermediate resistance for the US 10y yield stands at 1.70% while correction potential for the dollar brings us to EUR/USD 1.1985. One of the biggest victims of higher US real yields in other markets was gold. The price for bullion fell off a cliff, from $1910/ounce to $1873/ounce.
US President Biden came up with a new proposal in a bid to revive talks with Republicans about his more than $1tn infrastructure spending plans over the next decade. He is prepared to drop demands for an increase in the corporate tax rate from 21% to 28%, the FT reported citing sources familiar. Instead, he proposes a more aggressive tax law enforcement as well as to impose a minimum tax of 15% for businesses that have lots of tax credits and deductions. White House Press Secretary Psaki stressed that this doesn’t mean Biden is completely abandoning efforts to raise the tax rate to 28%, saying the current offer was for this specific negotiation.
The Reserve Bank of India left its benchmark interest rate unchanged at 4%. RBI Governor Das said the MPC voted unanimously and wanted to continue with its accommodative stance as long as necessary to support growth and keep inflation within the target. India is being hit by a severe second Covid wave, triggering a downward revision for growth to 9.5% this year vs. 10.5% projected earlier. Retail inflation is seen at 5.1%, within the tolerance band of 4% +/- 2ppt. The RBI also announced a higher amount of bond purchases of about INR 1.2tn for the second quarter in the fiscal year. The Indian rupee is losing marginal ground, flirting with the USD/INR 73 barrier.