Yellen puts June rate hike to sleep

Janet Yellen’s speech provided a glimpse into the Fed’s interpretation of last Friday’s concerning Non-Farm Payrolls (NFP) report.

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From her speech, it was clear Fed officials had had their confidence in the US economy shaken by the dramatic slowdown in May hiring. Nonetheless, comments from other Fed members, Bullard and Lockhart, overnight continue to emphasise the Fed’s desires to see two rate hikes this year. This means the bar for the NFP release at the start of July may be set much lower than usual for them to still get a July rate hike out.

The DXY dollar index managed minor gains in the overnight session against all of the G10 currencies and regained the 94 handle.

The collapse in the US dollar has seen commodity prices surge. Oil reached a 10-month high overnight, iron ore gained 2.1%, copper 0.2% and gold 0.1%. These moves have been mirrored in agricultural commodities as well, and all of this points to building global inflation. The Fed has been at pains to emphasise their concerns over a blowout in inflation if rates are left too low for too long, and this validates why they may still hike rates even when the economy still looks quite weak. These concerns underpin the case for why the Fed wants to see two rate hikes this year, and why even an NFP of 100,000 or better in July may still be enough to see a July rate hike.

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Equity markets had a strong session overnight, with energy and materials being the stand out performers in the S&P 500 and FTSE, respectively. The S&P 500 managed its highest close of 2016 at 2109, and proved itself remarkably resilient in the wake of Friday’s NFP collapse. The technicals on the S&P 500 are still very bullish, with the Ichimoku cloud still showing the index in an uptrend. The valuation picture on the index is undoubtedly concerning, but a steady move higher in equities and commodities bodes well for today’s Asian session.

The focus in Australia will be on the RBA meeting. Whilst rates are likely to be left on hold, any discussion around the inflation outlook for the Australian economy could see some major moves in the Australian dollar. Yesterday’s TD-MI monthly inflation gauge fell to 1% YoY in May, and if a number in that region is borne out in the official 2Q CPI you can pretty much guarantee two further rate cuts, maybe even three.

Asian markets are looking to move higher today, supported by weaker currencies and the ongoing rally in commodities. Japanese markets will likely be happy with the 1% weakening in the yen overnight, and we’re calling the Nikkei up 0.5%. BHP’s ADR gained 4.9% in the US session, and the materials and energy space is likely going to be out in front in the ASX today. We’re calling the Aussie market up 0.2%.

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