Written Commentary
STOCK INDEX FUTURES
Futures are mixed across the indexes, with the Dow trading flat while the S&P and Nasdaq slipped as investors digest a recent downgrade of US credit and assess the fiscal outlook of the US’s growing debt situation. Investors will be closely watching any potential developments in trade news with the light week of economic data.
On Thursday, the purchasing managers index will give an up-to-date indication of the health of the US manufacturing and services sectors in the US, with this data most likely feeling the impact from tariffs. Most official US data has suggested that the economy is holding up well, although the data is backwards-looking and has not properly captured the impact of tariffs. Although many high tariffs have been scaled back, tariffs of 10% or more remain and are very high by historical standards.
CURRENCY FUTURES
The June US dollar index continued its decline against most major currencies. On Friday, a large global credit rating agency downgraded the US’s credit rating from AAA to AA1, citing rising government debt and a widening budget deficit. This added to concerns over new tax legislation that is making its way through Congress, which includes hundreds of billions in new tax cuts without any corresponding offsets in spending. The June US dollar index is trading just above the $100.1 level.
June British pound futures hovered just above flatline, trading around $1.336. UK CPI inflation data for April is due Wednesday, with an annualized rise of 3.3% expected due to higher energy prices and increased taxes on businesses. Strong inflation data could add to expectations that the Bank of England will slow down its rate-cutting cycle.
Euro futures edged higher on dollar weakness. German PPI inflation for April shrank 0.9% on an annualized basis, lower than forecasts of a contraction of 0.6%. The EU lowered its growth forecast by half a percent for the year ending 2025, Monday, citing higher US tariffs impacting exports. June euro futures are trading just over $1.125.
The Reserve Bank of Australia lowered its benchmark interest rate by 25 bps to 3.85%, matching widely held expectations. Headline and core inflation have fallen in the bank’s 2%-3% range, and the unemployment rate is hovering around 4%. Strong jobs and wage growth data have sparked concerns about persistent inflation and may temper the amount of easing this year. June Australian dollar futures are down over half a percent following the announcement.
INTEREST RATE MARKET FUTURES
Futures are higher across the curve as investors started to buy on weakness prompted by Friday’s credit rating cut. Despite the recent rating downgrade, significant selling of US Treasurys is unlikely, as most investment mandates do not require AAA ratings for US Treasurys. The rating cut does not come as a surprise, as two other ratings firms had previously downgraded the US’s rating, and the present budgetary situation has largely been priced in over recent days.
The 10-year Treasury yield fell to 4.46%, and the 30-year yield dropped to 4.92%. The spread between the two- and 10-year yields decreased to 48 bps after rising to 52 bps Monday.
With the limited economic data this week, focus will shift to speeches from Fed members, although it remains to be seen what new information investors will be able to gather from these speeches. New York Fed President John Williams and Atlanta Fed President Raphael Bostic both signaled that rate cuts are unlikely in the near term in speeches on Monday. Markets are anticipating the Fed to cut rates at the September meeting.
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