Written Commentary
STOCK INDEX FUTURES
Stock index futures are lower after President Trump announced he will be doubling the tariffs on steel and aluminum to 50% on June 4th. Beijing said the US had “seriously undermined” the 90-day truce between the two countries. Treasury Secretary Scott Bessent said he is confident that President Trump and Party Chairman Xi Jingping would hold talks sometime this week.
A busy week for economic data coming out of the US. Manufacturing PMI for the month of May is due at 8:45 a.m. central time, while construction spending data, ISM manufacturing PMI, and manufacturing prices data are due at 9:00. Manufacturing PMI is expected to come in at 52.3, construction spending is expected to increase +0.4%, and ISM manufacturing PMI and manufacturing prices are expected to be 49.3 and 70.2, respectively.
JOLTS job openings data for April is due Tuesday morning. Last month showed 7.192 million job openings. Wednesday will provide ADP non-farm employment change figures, services PMI, ISM non-manufacturing PMI, and prices data for the month of May. Thursday will see continuing jobless claims and initial jobless claims, as well as trade balance figures for April, which will likely show a sharp drop in imports.
On Friday, nonfarm payroll figures, the unemployment rate, and average hourly earnings data for the month of May will finish what will be a key week for investors as they assess the impact of US tariffs on the job market. The readings from the data will give insight into how the post-tariff economy is holding up in the US, and labor market data will be key to assessing any potential moves from the Fed in the future.
Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 22 times their expected earnings over the next 12 months, as of May 30, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the many uncertainties surrounding the economic outlook, primarily the still-unfolding consequences of the Trump administration’s trade policies.
INTEREST RATE MARKET FUTURES
Futures are lower across the curve, with longer-date yields down the most as investors pull out of US assets following renewed trade war fears between the US and China. Investors worry that a trade war with China will result in higher inflation and slower economic growth. Recent trade policies, combined with the fiscal picture of the US debt, have caused investors to demand higher yields on bonds, as they question the confidence of US debt. Most of the selling in the bond market recently has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.
Fed Chairman Jerome Powell will speak at 12:00 p.m. central time today; markets will be closely watching his remarks following the recent trade developments for any indication of the future of monetary policy in the US. Markets are expecting 50 bps of easing this year, with the first rate cut coming at the September meeting.
The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.
The 10-year Treasury yield is 4.43%, and the 30-year yield is hovering around 4.96%. The spread between the two- and 10-year yields increased to 50 bps, up from 48 on Friday.
CURRENCY FUTURES
The USD index is lower as markets assess renewed trade-war fears, with rising inflation and slowing economic growth in focus. June contracts erased all their gains from last week in overnight trade. This week will provide various economic releases, likely impacting price swings in the dollar. Labor market data and trade news will likely be the main drivers of price action in the dollar this week.
Euro futures are higher, as investors pull out of US assets amid growing trade policy uncertainty. The euro reached its highest level since April 21. Manufacturing PMI for the eurozone in May came in higher than expected at 49.4, beating expectations of 48.4, showing a slight contraction in manufacturing activity. Germany posted a lower-than-expected PMI reading, while France and Spain both beat expectations. On Tuesday, Eurozone CPI and unemployment data will be released at 4:00 a.m. central time, with inflation expected to come in at 2.0% on an annualized basis. The European Central Bank is expected to cut its key interest rate on Thursday, a move investors believe could be one of the final reductions in this cycle, unless a recession threatens the eurozone economy.
British pound futures are higher following a weaker dollar and stronger-than-expected housing price inflation. The Nationwide housing price index rose 3.5% on an annualized basis, greater than the 2.9% economists were expecting. Manufacturing PMI for the month of May was 46.4, greater than the expected 45.1 and an increase over last month’s 45.4. Wednesday will see services and composite PMI for the region.
Yen futures are sharply higher as capital spending in the country increased 6.4% in the first quarter, notably higher than last month’s decline of -0.2%. The manufacturing PMI for May was 49.4, greater than last month’s 48.7, although still indicating a decline in activity. Japan will auction 10-year bonds at 10:35 p.m. central time tonight. Investors will be paying close attention to demand for JGBs after a sell-off in recent weeks caused yields to surge and as reports came out that the Japanese government was considering reducing their longer-term debt issuance.
The Australian dollar is higher, with June contracts up over half a percent on dollar weakness. May saw manufacturing activity come in at 51.0, below expectations of and last month’s figure of 51.7. The Reserve Bank of Australia will release their meeting minutes from their last meeting at 8:30 p.m. central time, and quarterly gross operating profits for private companies will also be released at 8:30.
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