Dollar Pares Some Losses

CURRENCY FUTURES

The USD index is higher, paring some losses from yesterday as investors seek safe haven assets following Israel’s strikes on Iran. The dollar fell to a three-year low on Thursday after weaker-than-expected inflation data increased bets that the Fed would resume its rate-cutting policy soon and as worries over US tariffs mounted.

Euro futures are lower after new data showed that industrial production in the region contracted at a faster pace than expected. Industrial production in April shrank -2.4% from March as Europe’s exports to the US fell by a third. The drop in activity is the fastest drop in production in more than two years. The euro hit over a three-year high on Thursday, making goods made in the currency area more expensive for foreign buyers, dampening some global demand as well. The EU’s trade balance in April was $9.9 billion, below an expected reading of $18.2 billion.

British pound futures are lower amid the ongoing strikes in the Middle East. Britain’s trade minister on Thursday said that the country is ready to implement its side of the tariff deal it signed with the US back in May and is hopeful that President Trump will put the agreement into effect in the coming days. The US agreed to reduce tariffs on imports of UK cars and steel to the US, with Britain agreeing to lower tariffs on beef and ethanol. UK GDP contracted in April, with a -0.3% growth rate from March, below expectations of -0.1%. Industrial production and manufacturing production sectors also contracted in growth, beyond economists’ expectations. Data also showed the UK labor market cooled in the three months to April, with the unemployment rate rising and the economy adding fewer jobs than expected. Despite these headwinds, policymakers are unlikely to lower interest rates at the June 19 meeting. Markets are still anticipating a rate cut in August.

Japanese yen futures are lower. Industrial production in April contracted less than expected, with month-over-month activity declining -1.1% vs. an expected -1.2%; factory activity in March grew 0.2%. New data showed a further deterioration in business sentiment during the second quarter, as uncertainty surrounding US trade policy weighed on the country’s export-driven economy, with the BSI Manufacturing Conditions index falling to -4.8 from -2.4.

Australian dollar futures are lower, erasing yesterday’s gains as risk sentiment soured following the developments in the Middle East. Markets are pricing in an 80% chance the Reserve Bank of Australia will cut rates by 25 bps at its July meeting, with another 50 bps of easing for the remainder of the year as well.

INTEREST RATE MARKET FUTURES

Futures are relatively flat across the curve; yields fall in response to Israel’s strikes in Iran.

Thursday’s 30-year bond auction was met with strong demand, cooling market fears that longer-dated US debt would come under scrutiny and face lower demand in the midst of heightened yields on long-term bonds globally. The auction fetched a yield of 4.844%, more than a basis point below where the market was before bidding, signaling strong demand with foreign demand remaining strong as well. Primary dealers, who are required to bid at auctions, only had to take down 11.4% of the bonds—below the 14.4% average from the previous six 30-year bond auctions. The auction follows Wednesday’s 10-year treasury note auction, which also saw similar results. The auctions helped contribute to a rally in the bond market in recent days, which was also spurred on by Thursday’s weekly initial unemployment claims that painted a picture of a worsening labor market.

Monthly PPI inflation in May rose 0.1%, below expectations of 0.2%. Annualized CPI inflation rose at a rate of 2.4% in May, just below the expected 2.5% and above the previous reading of 2.3%, showing inflation ticked slightly higher. The readings added to bets that the Fed will cut rates in September, with markets now pricing in a 58% likelihood of a September rate cut. Despite the cooler-than-anticipated inflation readings this week, it is likely inflation will begin to tick higher in the coming months as pre-tariff inventories that retailers and producers stocked up on begin to wind down.

The 10-year Treasury yield is 4.36%, and the 30-year yield is hovering around 4.84%. The spread between the two- and 10-year yields fell to 43 bps from 46 bps Thursday.

STOCK INDEX FUTURES

Stock index futures are sharply lower after Israel carried out strikes in Iran overnight. Israel’s prime minister, Benjamin Netanyahu, has vowed that the operation against Iran’s nuclear and military facilities would continue “for as many days as it takes,” stoking fears of escalation. Iran described the strikes as a “declaration of war” in a letter to the United Nations. It has also launched a drone attack on Israel in response.

PPI inflation data for May came in lower than expected, adding to bets that the Fed will cut rates in September; rate cuts from the Fed would be supportive of the equity markets. Weekly initial jobless claims on Thursday came in higher than expected, with 248,000 claims vs. an expected 242,000, matching last week’s revised figure.

The University of Michigan will publish its latest consumer sentiment index and inflation expectations gauges at 9:00 a.m. CT, offering further insight into public confidence in the economy.

Stock valuations are still relatively high by historical standards; the S&P 500 was trading at 22 times its expected earnings over the next 12 months as of June 6, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.

Interested in more futures markets?  Explore our Market Dashboards here.