Market movers today
- The FOMC meeting will be the highlight for markets today. We doubt that Fed will send any significant new policy signals, but updated projections will likely now show a first rate hike in 2023 (no hike in 2023 in current ‘dots’) and we might see the first cautious Fed comments on possible tapering in 2022.
- Chinese retail sales and industrial production for May are released and should start to move lower after strong base effects boosted figures in April.
- US President Biden rounds off his European tour with a meeting of Russia’s President Putin in Geneva today. Relations remain tense between the countries, with Russian cyber-attacks and US sanctions among the sore spots.
The 60 second overview
FOMC tonight: Although no monetary policy changes are expected, markets will focus on any hints of Fed’s tapering plans for 2022. While we expect Fed to remain cautions, Powell could acknowledge that tapering discussions have moved closer. Fed will also update its economic projections, and we expect the ‘dot plot’ to signal the first rate hike in 2023. This is unlikely to be a major surprise for the markets, as seven FOMC participants signalled a 2023 hike already in March ‘dots’, and markets have already priced in two hikes for 2023. See also our full Fed preview: Fed Research Preview: Start talking about talking about tapering, 14 June.
US Macro: Yesterday, US Retail sales for May declined more than expected (-1.3% m/m; prev. +0.9%). Control group also fell 0.7% m/m but retail sales remain at elevated levels. We do not put too much focus on the lower figure as the decline was driven by fading support from the earlier stimulus checks, as well as normalizing consumption patterns amid easing of service sector restrictions.
Oil: Crude oil prices extended their rally with Brent reaching USD 74.70 overnight, as data from the American Petroleum Institute showed largest weekly decline in US crude oil inventories since September last year. While both OPEC+ and US shale oil producers are expected to support the supply of crude oil, the rise in prices is being driven by recovering demand outlook as economies continue to reopen.
Metals: Yesterday, copper prices continued their decline from the peak in early May and this morning China signalled that it would sell some of its industrial metal reserves to avoid further rise in prices. We expect modestly lower industrial metal prices going forward, as the Chinese manufacturing cycle has already peaked, and China is by far the largest consumer of industrial metals globally.
Equities: Equities finished mixed as investors nerve themselves for the FOMC meeting, with European markets mostly higher and US lower. Growth and bond proxies broke their week-long streak of outperformance, with tech, consumer discretionary, and real estate among the worst performing sectors. In its place, industrials, energy, and financials were the top picks. In turn, this pulled S&P and Nasdaq back from the all-time high set in the previous session. Dow -0.3%, S&P -0.2%, Nasdaq -0.7% and Russell 2000 -0.3%. No clear split between cyclicals and defensives, and implied volatility slightly rising. The muted sentiment continuing in Asia this morning with smaller losses. US futures point to a mixed opening.
FI: The global bonds markets are in a wait-and-see mode ahead of the FOMC meeting tonight. The consensus view has 1) no change in policy rates, 2) the rise in inflation is transitory but 3) watch out for a discussion on tapering and a possible change to the “dot plot” and if they put in a hike in 2023.
FX: Today, focus turns to the FOMC meeting. If Fed proves hawkish, this may add to taking EUR/USD below 1.20 over the coming months, in line with our expectation.
Credit: Monday’s tendency of CDS indices under pressure and cash bonds doing better continued yesterday. Xover widened almost 4bp and Main ½bp. HY bonds tightened 2bp and IG ½bp.
