The familiar characteristics of restrained trading conditions were evident to start the week once again, with a lack of tier-one North American allowing the S&P to levitate higher and close above the 1,950 level. While the absence of volatility can be partially attributed as a function of central bank policy, it is hard to argue against the hypothesis that summer doldrums have kicked in early, with the VIX continuing to remain depressed in the low double-digits. The firming on the short-end of the US treasury curve helped the DXY remain bid throughout the majority of the session, the reaction to a speech from St. Louis Fed President Bullard that hinted the FOMC may need to assess hiking rates earlier than expected given the Fed is closer to its macroeconomic goals then they have been in last five years.
The overnight session kicked off with Chinese inflation data surging over the month of
May, hitting 2.5% when measured on a y/o/y basis, just above the 2.4% that analysts had been expecting, but a much quicker clip than the 1.8% registered in April. The headline reading was the fastest pace CPI has increased in four months, yet was mostly attributable to higher food prices as the core reading only advanced 1.7%. The PBoC will want to keep an eye on how consumer prices develop over the coming the months, as the government will be wary of CPI creeping back up to the 3.0% handle seen at the end of last year, not wanting to sacrifice runway prices as a result of stoking economic growth to achieve their GDP targets. In what may have been a foreshadowing of the CPI numbers to come, the PBoC fixed the CNY exchange rate higher for a third day in a row, a sharp u-turn from the weeks of weakening aimed at tempering carry-trade fever, potentially signaling the government may be cognizant of the effects the weaker Yuan is having on consumer prices. Despite the higher CNY fix and a slightly warmer inflation reading, the Shanghai Comp finished its session up 1.08%, with investors still positive on the targeted reserve ratio requirement cuts that were announced yesterday.
The main economic events for European markets saw the release of manufacturing and industrial production for the UK economy hit the wires this morning, both of which beat y/o/y forecasts coming in with increases of 4.4% and 3.0% respectively. The April output data telegraphs the UK economy is off to a good start for the second quarter, with annualized industrial production seeing its biggest annual increase since 2011, and manufacturing volume having risen for five months in a row. The manufacturing and industrial output numbers dovetail nicely into the employment data set to be releasedtomorrow, with all eyes squarely focused on how the development for the UK labour market will effect the overall slack in the economy. The hawkish drumbeat from specific members within the Bank of England is beginning to amplify, as McCafferty was on the news wires yesterday speaking about how the time for normalization is approaching, the timing of which will depend on how the economy performs over the summer. After initially strengthening on the release of the data set, Cable has backed away from the 1.68 handle and is lower on the day, though managing to outperform the EUR as the broadly stronger USD puts downward pressure on EURUSD, which has corralled the pair into the mid-1.35s.
Heading into the North American open, equity futures are displaying a red tinge that could see a bit of profit taking materialize when the opening bell is rung, while yields on the 10-year treasury rebound to 2.63%, and the DXY heads into the high-80s as it is dragged along with firmer yields. USDCAD has refused to budge in a material fashion away from the 1.09 handle throughout the overnight session, continuing to trade in a range-bound environment as traders have a hard time finding conviction to push the pair in any specific direction. Increasing yield spreads between US and Canadian 5-year debt that have not been this wide since Q3 2009 warn a break to the top-side of the range in the 1.10s could occur, especially considering how well protected downside breaches of 1.09 have been throughout the last week.
Looking ahead to the remainder of the session, the North American economic calendar is again rather sparse, though we will get the JOLTS report on job openings at 10:00EST. A third month of seeing job openings surpass the 4M level is forecast to materialize, and if it occurs, will fold in nicely to the NFP report from Friday and the overall assessment the US labour market has stabilized and is back on the upswing. If previous resistance, now turned support, in the mid-80s for the DXY can be held, a break-out for another test of the 81 level can not be ruled out, which would put downward pressure on the crosses like EURUSD and USDCAD.
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