Written Commentary
CURRENCY FUTURES
The USD index edged higher, with the largest gains seen against the British pound as investors await key inflation readings and news regarding the trade talks between the US and China. The dollar had strengthened on Friday after the May jobs report showed slightly stronger-than-expected employment growth, although cracks in the labor market are starting to appear. Investors will also be watching this week’s Treasury auctions for foreign demand. If foreign investors are looking to reduce exposure to dollar-denominated assets, there is a chance they might not reinvest in new bonds. Weak demand at the auctions could put downward pressure on the dollar.
Euro futures are little changed in the overnight session. A host of ECB officials is scheduled to speak this week. Policymaker Peter Kazimir said the central bank was nearly done with interest rate cuts and should watch data over the summer to determine whether more tweaks are necessary. The European Central Bank cut its benchmark interest rate by 25 bps to 2.00% last week. ECB President Christine Lagarde said in a press conference following the decision that the central bank is likely “getting to the end of the monetary-policy cycle.” Markets are now pricing in only one more rate cut by the end of the year.
British pound futures are lower after new data showed the UK labor market cooled in the three months to April, with 89,000 new jobs added vs. a previous 112,000. Average weekly earnings excluding bonuses rose 5.2% from a year earlier, down from 5.5% in the previous reading. The unemployment rate climbed to 4.6% from 4.5% in the prior quarter, the highest since May-July 2021. Despite signs of a weakening labor market, policymakers are unlikely to lower interest rates at the June 19 meeting, as April’s inflation spike to 3.5% and growing global uncertainty continue to weigh heavily on their decision-making. Markets are still anticipating a rate cut in August.
Yen futures are little changed as investors await news regarding trade talks between the US and China. A revised GDP reading saw GDP unchanged at 0.0% growth vs. a previous reading of a -0.2% contraction. Despite the upward revision, the result still reflects a sharp deceleration from the 0.6% growth recorded in the prior quarter. Japan is considering buying back some super-long government bonds issued in the past at low interest rates in order to rein in the abrupt rise in bond yields. Yields on super-long Japanese government bonds rose to record levels last month due to dwindling demand from traditional buyers such as life insurers and global market jitters over steadily rising debt levels. The move would also come on top of a plan to trim issuance of super-long data government bonds.
Australian dollar futures are lower. Consumer sentiment rose for the fourth time this year, with the Westpac-Melbourne Institute Consumer Sentiment Index increasing by 0.5% month-over-month in June, down from a previous 2.2% rise in May. Meanwhile, business confidence improved, with the NAB Business Confidence Index rising to 2 in May from -1 in the previous month—turning positive for the first time since January and reaching its highest level in four months.
INTEREST RATE MARKET FUTURES
Futures are higher across the curve. Friday’s resilient labor report reinforces the Fed’s wait-and-see approach to monetary policy while the larger inflation picture plays out. Wednesday’s CPI inflation report for May will be a key indicator to see how tariffs have affected inflation in the country and for signals as to the Fed’s path on monetary policy. Headline CPI inflation is expected to increase 2.5% in May, a step above April’s 2.3% reading.
The US will sell $119 billion in Treasury notes and bonds this week; three-year Treasurys will be auctioned today and 10-year Treasurys on Wednesday. Thursday will see a highly anticipated 30-year Treasury auction. This week’s Treasury auctions are drawing heightened attention as key indicators of market sentiment toward US assets. While investor demand appears strong for short- and medium-term debt, interest in longer-term bonds remains uncertain. Bond markets recently have raised alarms about a lack of fiscal discipline worldwide. The added burden of tariffs is also expected to dampen global growth and pressure governments to increase spending. The 30-year auction will be closely watched for signs that bond investors are putting their foot down and rejecting countries with huge fiscal deficits and mountains of debt.
Markets are expecting 50 bps of easing this year from the Fed, with the first rate cut coming at the September meeting.
The 10-year Treasury yield is 4.45%, and the 30-year yield is hovering around 4.91%. The spread between the two- and 10-year yields fell to 45 bps from 47 bps Monday, ahead of the key auctions and inflation data.
STOCK INDEX FUTURES
Stock index futures are little changed as investors await further developments regarding trade talks between the US and China. Tuesday’s talks are expected to continue to focus on easing tensions over rare earths and tech. Treasury Secretary Scott Bessent said it was a “good meeting,” while Commerce Secretary Howard Lutnick called the negotiations “fruitful.”
The Consumer Price Index (CPI) for May is set to be released tomorrow; month-over-month inflation is expected to rise 0.2%, while annualized inflation is expected at 2.5%. Following the CPI data, Producer Price Index (PPI) inflation data will be released on Thursday, with month-over-month inflation expected to rise 0.2%. On Friday, the University of Michigan will publish its latest consumer sentiment index, 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.
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