Fed officials give public comments

• St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan who spoke on a panel on Monday discussed how the playbook used after the 2007-2009 recession may not apply this time. The policymakers said the conversation over how fast to end the Fed's USD 120bn in monthly bond purchases is just beginning, but a faster withdrawal from the program could give the central bank more leeway in deciding when to raise interest rates. They highlighted some of the major questions Fed officials will have to grapple with as they work through an early test of the central bank's new strategic framework, at a time when inflation is ticking up and the labor market recovery is weaker than expected. Bullard said policymakers will need to decide how much inflation they are comfortable with and for how long they would tolerate an overshoot of the Fed's target before adjusting monetary policy. He also added that the discussion over how to adjust the Fed's asset purchases will include deciding whether to reduce purchases of mortgage-backed securities at a different pace than Treasury securities, when to start and how quickly to move. Kaplan said that the faster expected start to hiking rates was a reaction to a US economic outlook that took a sharp turn between December and June.

• In other comments New York Fed president John Williams said on Monday that The US economy is rebounding rapidly from the crisis caused by the coronavirus pandemic, but more progress is needed before the Federal Reserve should begin to scale back its support. He added that the recent inflationary pressures appearing as some businesses struggle to keep up with a surge in demand will subside as the economy stabilizes. He expects the US economy could grow by 7% this year after adjusting for inflation, bolstered by rising vaccinations and strong fiscal support, adding that the rapid opening of the economy is creating imbalances between supply and demand and leading to temporary price increases, but inflation could level off over time. He expects inflation to come down from around 3% this year to close to 2% next year and in 2023. Williams said that with more than 7 million jobs lost when compared to before the pandemic, the US economy still has a long way to go before it is back at full strength.

• The ECB President Christine Lagarde said on Monday that the Eurozone and the US are clearly in a different situation when it comes the outlook for inflation, playing down any impact from US rate hike discussions. Lagarde rejected comparisons between both economies, saying the U.S. recovery was farther ahead of the Eurozone's. She did however acknowledge that there would be some spillovers due to rising inflation in the US through higher import prices, stronger exports and potentially even Eurozone citizens' expectations about inflation. She added the central bank estimated a cumulative impact of 0.15% on inflation and of 0.3% on growth between 2021 and 2023 in the euro zone from the U.S. stimulus package, reaffirming the bank's March projections.  Lagarde re-affirmed her message, delivered after the ECB's last policy meeting, that it was not yet time to allow interest rates to rise, so the central bank would maintain favorable financing conditions.

Today’s Economic Data and Events

• 15:00 BRL   BCB Copom Meeting Minutes                               
• 18:00 USD  Existing Home Sales (May) Forecast 5.72M    
• 22:00 USD  Fed Chair Powell Testifies 

Fixed Income

• The US Treasury market witnessed some wide moves to start the week of trading as investors reassess inflation risks following last week’s FOMC. The 2yr UST held on to its new elevated level, moving up to nearly 0.28% before settling around 0.25%. The 10yr endured more extreme moves, pushing to as low as 1.35% in early trading before Treasuries faded over the course of the rest of the day and yields closed back up near 1.5%.
• Emerging market yields were mixed overnight. Yields on Indian government 10yr bonds added almost 3bps to 6.03% while South African yields continue to climb higher, adding 12bps to 9.379%. In Turkey, the move in 10yr yields was more muted, rising just 2bps to 17.23%.
• Moody’s assigned a rating of Aa2 to ADQ, the Abu Dhabi government owned holding company. The rating has a stable outlook. ADQ doesn’t have any public debt in the market at the moment.

FX

• Currency markets moved against the dollar for the first time in four days overnight as the rapid gain in the greenback takes a breather. The DXY index fell 0.35% to 91.899, led lower largely by gains in EURUSD (up 0.46% to 1.919) and GBPUSD, up 0.9% to 1.3934.
• Emerging market currencies showed a mixed performance. USDTRY pushed higher, adding 0.4% to close at 8.7722 while ZAR managed to recover some strength, with USDZAR falling 0.8% to 14.2343. INR also weakened as concerns rise about a potential for a third wave of Covid-19 in the country as India has reopened much of its economy. USDINR rose 0.33% to 74.105.

Equities

• Following the sizeable losses endured last week, and especially on Friday, global equity markets started the week on the front foot yesterday. In the US, the S&P 500 gained for the first time in five sessions, with one of its best days in over a month as it closed 1.4% higher. The NASDAQ and the Dow Jones added 0.8% and 1.8% as they rebounded from the oversold levels seen at the close of last week.
• In Europe, the STOXX 600 gained 0.7%, with Germany’s DAX the notable gainer as it closed 1.0% higher. The FTSE 100 gained 0.6%, boosted by grocery stocks.
• Within the region, both the DFM (-0.1%) and the ADX (-0.5) lost ground yesterday. The Tadawul gained 0.6%.

Commodities

• Oil markets remain unperturbed by the swings in other financial markets and continue to look to tight fundamentals to support their drive higher. Brent futures settled up 1.9% at USD 74.90/b and have pushed above USD 75/b in early trade today. New multi-year highs are likely to continue to be hit in the current cycle. WTI managed even stronger gains of 2.8% to USD 73.66/b overnight and are holding near those levels in early trade today.
• Metals prices bounced back in line with moves away from the dollar. Gold prices rose 1% to USD 1,783/troy oz while palladium was the standout among precious metals, rising 4.6% to USD 2,588/troy oz. Across industrial metals both aluminium and copper managed to recover some poise after some heavy selling at the end of last week.

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