Biden administration aims big with budget

• The Biden administration outlined its first annual budget, planning to spend more than USD 6trn in the next fiscal year. The budget incorporates previous spending plans announced by the Biden administration, including infrastructure spending of as much as USD 2trn, but also outlines new spending on defence and climate change. The proposed spending would be financed by raising corporate and income taxes for wealthy Americans along with a higher capital gains tax that would be applied retroactively. While ambitious, increasing taxation to finance the spending plans may struggle to make it through Congress where Democrats have only tenuous control.
• Such fiscal largesse will add more froth to the inflation debate and indeed questions remain as to whether the US economy still needs the scale of spending the government is proposing. Goods and services purchases rose 0.5% in April after an upwardly revised 4.7% increase in March. Meanwhile the PCE index rose 0.6% m/m in April and 3.6% y/y, well above the Federal Reserve’s target of 2% on average. A large share of that increase in the Fed’s preferred price gauge will be down to base effect measures but core prices are rising consistently on a monthly basis. Nevertheless, Fed officials have stressed the transitory nature of inflation that they are currently observing in the economy.
• China’s economy showed some signs of moderation in May as official PMI numbers for the month displayed little change from April. The manufacturing PMI came in at 51, down from 51.1 a month earlier, as high input costs weigh on activity: the manufacturing input price index rose to 72.8, its highest level since 2010. In the services sector output expanded to 55.2 from 55.1 a month earlier.
• Japan’s economy may have stalled out at the start of Q2 with focus on whether the country will go ahead with this summer’s Olympics while large sections remain under emergency regulations. Retail sales fell 4.5% m/m in April and industrial production rose by 2.5%, both underperforming consensus estimates. Japan has had a slow start to vaccinating its population with less than 9% of its total population have received at least one dose of a Covid-19 vaccine.
• Market focus this week will turn to PMI surveys which will be released for India and Turkey (June 1), Japan, Saudi Arabia and the UAE (June 3) and final estimates for the Eurozone and US. The US nonfarm payrolls at the end of the week will also be in focus after last month’s wide miss. Market expectations are for job gains of around 600k for May.

Today’s Economic Data and Events

05:00 CH Mfg PMI May: Forecast 51.1

11:00 TU GDP y/y Q1: forecast 6.3%

16:00 IN GDP y/y Q1: forecast 0.9%

16:00 GE CPI y/y May: forecast 2.3%

Fixed Income

• An index of US Treasuries was on track for its second monthly gain in 2021 as the market is buffered between fears of inflation and dovish sentiment from Federal Reserve leadership. Yields on 10yr USTs swung from a high of 1.6233% toward the start of trading last week to a low of 1.552% mid week before closing just shy of 1.60%, roughly in the middle of the range they have held to for the last two months and down almost 3bps w/w. This week’s nonfarm payrolls may provide a clear catalyst for a break higher or lower. Yields at the front end of the curve drifted steadily lower during the week, closing at 0.1407%, a drop of a bit more than 1bps w/w.
• Bond markets rallied in general last week with European bonds higher and high-yield and USD emerging market bonds gaining. Local currency markets were more mixed, however. South African bonds have extended their recent gains with 10yr yields slipping by 7bps to 9.291% while in India 10yr government bonds sold off modestly to push yields back up above the 6% level. Turkish government bonds though saw a sharper move given further changes in leadership at the central bank there. Yields on 10yr Turkish government bonds moved up 36bps over the week to 17.84%.

• Regionally, Oman Arab Bank priced a USD 250m perp at 7.625%. The bank is rated ‘Ba3’ from Moody’s. Standard & Poor’s revised its outlook on Bahrain to negative from stable while affirming the rating at ‘B+’.
• Among major central banks taking decisions this week are Australia (June 1) and India (June 4). Neither is expected to change policy rates.

FX

• The dollar was bid up gently last week with the DXY index essentially closing unchanged at the end of trading. Markets will likely be treading water ahead of the nonfarm payrolls at the end of the week before the labour market data can set the next trajectory for USD assets.
• EURUSD oscillated over the week, closing up marginally as its hold on levels above 1.22 appear tenuous. Dovish commentary is growing louder from ECB officials with expectation that asset purchases will be extended at the ECB’s next meeting in mid-June.
• USDJPY provided much of the gains for the greenback, rising by 0.8% to push back solidly above 109 and potentially within reach of 110. All eyes will be on whether Japan will indeed host the Olympics this summer and benefit from any associated economic boost, even if the event would take place with no international spectators.
• GBPUSD extended its gains for a fourth week in a row, rising by 0.27% to close at 1.4188. Sterling got a boost from Gertjan Vlieghe, an MPC member, who indicated that the BoE could raise rates as early as 2022 provided the labour market continued to gain.
• Among emerging market currencies, USDTRY was the standout. The pair moved up 1.74% to 8.5625 at the end of the week after the lira hit a record low of 8.5981 following news that more leadership officials at the TCMB had been replaced. In contrast USDINR managed to strengthen in favour of the rupee, with the pair slipping to 72.436 ahead of this week’s RBI meeting.

Equities

• Global equity markets were seemingly focused more on the positives around the economic recovery and a receding pandemic threat last week rather than the lingering concerns over resurgent inflation. In Europe, the composite STOXX 600 gained 1.0% over the week on the back of a 0.6% gain on Friday to hit record highs. France’s stocks were a key driver as the CAC gained 1.5% w/w on the back of improving sentiment – encapsulated in the strong survey results from INSEE on Wednesday. The DAX gained 1.0% w/w but the UK’s FTSE 100 lagged with a 0.1% gain.
• In the US, equities seemingly shrugged off the high PCE print at the end of the week, ending up by 0.1% to 0.2% on Friday and with substantial w/w gains intact. The NASDAQ was the biggest gainer, climbing 2.1% compared to the previous week, while the Dow Jones (0.9%) and the S&P 500 (1.2%) also ended higher.
• In Asia, markets that had wobbled in the face of rising case numbers in recent months have stabilised and resumed their upwards trajectory. India’s NIFTY 50 closed up 1.7% w/w to hit a new record high while Japan’s Nikkei gained 2.9% w/w (but remains -4.3% off the multi-decade high hit in February).

Commodities

• Oil prices rallied steadily last week with Brent futures again threatening to push sustainably above USD 70/b. The international benchmark added 4.8% to settle at USD 69.63/b while WTI rose 4.3% to USD 66.32/b and Murban moved up 3.5% to USD 68.04/b.
• Oil market focus this week will be on OPEC+ which meets on June 1 to set production decisions for the coming months. Market expectation is that they will carry on with adding output until the end of July as agreed earlier this year but more attention will likely be placed on what they signal for the rest of 2021. Negotiations over Iran’s nuclear programme could lead to more output coming from the Middle East as Iran is not subject to an OPEC+ production target.

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