Daily Market Outlook, June 6, 2024

Munnelly’s Macro Minute…

“All Eyes On The ECB, The Second G7 Central Bank Rate Domino To Fall”

Asian equity markets are in the green following gains on Wall Street, while US Treasury bond yields are trending lower. Yesterday, the Bank of Canada became the first G7 central bank to cut interest rates, reducing its policy rate by 25 basis points to 4.75% and signaling further cuts ahead. Markets are also absorbing US data that showed slowing private sector job growth according to the ADP report, while the ISM services survey indicated a strong rebound in activity despite a decline in the prices paid index.

Today, attention is focused on the European Central Bank (ECB) policy announcement followed by a press conference with President Lagarde. The ECB is expected to cut interest rates by 25 basis points, the first reduction since September 2019, lowering the deposit rate to 3.75%. This anticipated move, already signaled by policymakers, would make the ECB the second G7 central bank to reduce rates after the Bank of Canada. Markets will be attentive to hints about future policy, particularly whether another rate cut will follow in July. While Lagarde is likely to remain noncommittal about consecutive rate cuts, a higher threshold for a July cut is expected due to recent data showing persistent wage growth and services inflation. Markets anticipate another ECB rate cut in either September or October. New ECB economic forecasts, likely to be slightly adjusted, may include upward revisions to this year’s GDP growth and possibly inflation projections, though not enough to significantly alter current market interest rate expectations.

In the UK, attention will be on a couple of surveys. The construction PMI for May is of interest after April's report showed the strongest sector expansion in 14 months. The Decision Maker Panel (DMP) survey, closely monitored by policymakers, provides insights into businesses' expectations for prices and wages. For instance, the last survey showed one-year-ahead CPI inflation expectations falling to 2.9%, with markets hoping for a further decline.

Stateside data, trade figures, will receive limited attention. Market participants are eagerly awaiting tomorrow’s monthly US labor market report for May, looking for signs on whether the softness seen in the April report, such as the rise in the unemployment rate and slowdown in payroll growth, indicates a weakening labor market.

Overnight Newswire Updates of Note

European Central Bank To Begin Cuts But Path Beyond Gets Murkier
BoJ’s Nakamura: Appropriate To Maintain MonPol For Time Being
Australia Trade Surplus Rebounds In April As Imports Dive
Australian Home Loans Jump As Rental Yields Lure Investors
S&P 500 And Nasdaq Composite Close At Record Highs
Apple Set To Launch New AI Features June 10 At WWDC Event
Nvidia Tops $3 Trillion In Value, Leapfrogging Past Apple
US Clears Way For Antitrust Inquiries Of Nvidia, Microsoft & OpenAI
FTC Opens Antitrust Probe Of Microsoft AI Deal With Inflection
Eli Lilly’s Obesity Drug Crunch Shows Signs Of Easing In Japan
China Property Stocks Fall 20% From May High As Concerns Linger
Mexico Death Tied To Bird Flu Strain Never Before Seen In People

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0760-70 (1.2BLN), 1.0780 (500M), 1.0790-1.0800 (1.5BLN)
1.0830-40 (1.4BLN), 1.0850-65 (4BLN), 1.0880-90 (737M)
1.0895-1.0905 (4.4BLN), 1.0910-20 (2.8BLN)...
USD/CHF: 0.8900-05 (1.3BLN), 0.8975 (400M), 0.9000-20 (429M), 0.9035 (429M)
EUR/CHF: 0.9725 (500M), 0.9740 (1.7BLN). EUR/GBP 0.8550 (313M)
GBP/USD:1.2760 (379M), 1.2775 (211M), 1.2845-60 (680M)
AUD/USD: 0.6585 (355M), 0.6620-25 (464M), 0.6700 (528M)
AUD/NZD: 1.0720 (302M), 1.0880 (602M)
USD/JPY: 155.00 (923M), 155.15 (1.2BLN), 155.45-50 (2.9BLN), 156.00 (868M)
157.00 (1.5BLN), 157.50 (1.1BLN)
EUR/JPY: 167.80 (763M), 168.00 (650M), 169.45 (479M)
EUR/USD option hedging in large volumes is being used to combat potential impact from the European Central Bank (ECB) and Non-Farm Payroll (NFP) reports. Billions of euros worth of EUR/USD FX option strike expiries are approaching, and related hedging flows have been instrumental in keeping the EUR/USD contained for several weeks. However, the pair now faces increased volatility risk due to the upcoming ECB and NFP events. The overnight expiry implied volatility has spiked, indicating heightened risk. This jump in implied volatility reflects the potential for increased FX realized volatility until expiry. After the ECB announcement, the implied volatility rose from 7.0 to 10.0, and it has since reached 12.0 after the NFP report, marking its highest level since the May 15 U.S. CPI data release. The premium/break-even for a straddle has now increased to 54 USD pips, compared to 32 USD pips on either side.

CFTC Data As Of 31/05/24

Japanese yen net short position is -156,039 contracts
Euro net long position is 57,572 contracts
Swiss franc posts net short position of 44,366 contracts
British pound net long position is 25,402 contracts
Bitcoin net short position is -756 contracts
Equity fund managers raise S&P 500 CME net long position by 31.431 contracts to 978,007
Equity fund speculators increase S&P 500 CME net short position by 12,145 contracts to 330,057
Gold NC Net Positions increased to $236.6K from previous $229.8K