June rate rise by the Fed on the cards?

US and European markets pulled back overnight as hawkish Fed speakers and resilient US data made markets rethink their dismissive calls on a June rate hike. 

Federal Reserve
Source: Bloomberg

Fed speakers Williams and Lockhart both emphasised that June is a live meeting, and Lockhart believes markets are seriously under-pricing what the bounce back in 2Q US activity could mean for future interest rate increases. This helped the US dollar recover most of its session losses and the DXY dollar index finished essentially unchanged holding the $94.50 level. But it also raised wariness in equities as the VIX volatility index spiked up 6% to 15.6.

Although US inflation expectations did see much more of a boost overnight as 5-Year, 5-Year Forward Inflation Expectations gained 146 basis points. This was, no doubt, helped by oil rising up to its highest level in seven months. WTI oil gained another 1.6% overnight as API US crude inventories declined by 1.1 million barrels and Canada’s wildfires began to move back towards major oil facilities heightening production concerns.

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Iron ore also had a good session, gaining 1.4%, while copper closed up marginally higher by 0.1%. This should help support materials and energy sectors today. Asian markets are all set to open down after the poor leads from Wall Street. The ASX will be hoping the materials and energy space move higher, and that the banks hold up today.

The Aussie dollar has given back a lot of yesterday’s post-RBA minutes gains to close up 0.5%. At the moment there doesn’t seem to be a strong driver for it, and we may expect it to trade in a range between US$0.7240 to US$0.7380.

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The Atlanta Fed’s GDPNow estimate for 2Q moved down to 2.5% after the release of a range of US data overnight. While headline CPI was better than expected, Core CPI was slightly below forecasts.

Although on the brighter side, US industrial production saw its biggest month-on-month increase since November 2014.

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