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‘To hike or not to hike’ has been the mantra of global financial markets even before the first rate hike last December. It’s fair to say that the mantra will carry on well beyond the second rate hike, be it in June, July or September.
For the moment, the Fed still projects two rate hikes in 2016, and it will be interesting to see if that projection will change in the June meeting. If they keep their expectations, and there was no rate increase in June, then the probability of a July move will likely break substantially higher. Currently, it sits at 55%, according to the fed funds futures. What is clear is that upcoming US data and Fed-speak will continue to affect market expectations concerning US monetary policy.
While next week brings very few in terms of data, with perhaps wholesale inventories and University of Michigan sentiment survey of some interest, the focus will be on Fed chairperson Yellen’s speech on Monday, 6 June (early 7 June for Asia Pacific). Before that, FOMC voters Brainard and Mester will be speaking tomorrow, 4 June, and their comments could add to the hawkish tone from Fed policymakers recently.
Brexit vote is the elephant in the room
Besides US rates, June is shaping up to be a huge month for risk events, with Brexit another major ‘must-watch’ event. Furthermore, it could even be a bigger risk than the FOMC meeting. The impact of a Brexit will ripple throughout the financial markets across the world.
Although we have seen the ‘stay’ camp gaining momentum for most of May, there was a change in sentiments lately. A new opinion poll by the Guardian/ICM has given the ‘leave’ camp a tight 52-48 lead, re-igniting investors’ worry that UK voters will opt to leave the EU, come 23 June. Volatility began increasing towards the end of May, as the one-month GBP/USD implied volatility surged +44.6% on 26 May. Between 25 May and 2 June, the implied volatility soared 88.5%.
As the campaign intensifies over the next few weeks, GBP will remain vulnerable to opinion polls and Brexit news. It is widely expected that the immediate reaction to a Brexit is a sharp fall in sterling, where Goldman Sachs predicted a 20% slump. On the other hand, investors may expect a relief rally in GBP if the UK votes to stay in the EU.
Please have a read of our Brexit reports:
RBA, China trade, Japan GDP, Oil
Meanwhile, the Reserve Bank of Australia (RBA) will be meeting on Tuesday, 7 June, where the consensus is for an unchanged decision of the cash rate at 1.75%. Certainly, the odds of further rate cuts have fallen after a stronger than expected Q1 GDP. But the consensus is that the RBA is still expected to cut at least once more this year. What the solid growth number does is to buy more time for the central bank to make a decision, as inflation remains a concern.
China will also be reporting its trade numbers next week. The market is looking for another contraction in exports and imports for May at -4.2% YoY and -6.8% YoY respectively. Foreign reserves are estimated to drop modestly to $3.2 trillion in May from $3.22 trillion. Japan will announce the final estimates of Q1 GDP. Machine orders and PPI data may warrant some interest. As always, the weekly API, EIA oil reports, and Baker Hughes rig count may affect markets.
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