[Market Review].
The US Dollar Index hovered around the 90 mark to adjust. The U.S. Treasury bid $38 billion in 10-year U.S. Treasuries on Wednesday, and the results showed strong demand. After the auction, U.S. bond prices moved higher, with the yield on the U.S. 10-year Treasury note falling below 1.5% intraday for the first time since May 7. The dollar index was also affected by this, falling to 89.84 during the session, but soon returned to near the 90 mark.
It should be noted that the Fed’s reverse repo operations hit a record high for the third consecutive day. The spike in reverse repo usage is seen as a precursor to the Fed tapering its bond purchases. However, investors are taking a wait-and-see attitude ahead of today’s U.S. CPI data release.
In addition to the U.S. CPI data, investors are also watching Biden’s economic stimulus plan. A bipartisan House panel unveiled an eight-year, $1.25 trillion infrastructure plan after Biden and Republicans fell apart in talks. In the next few days, the panel will make recommendations on how to afford the plan, but the panel does not support tax increases, sources said.
Gold is slightly under pressure. Moving on to gold, gold oscillated narrowly in the $1887-1898 range during the day, eventually closing down 0.18% at $1887.92 per ounce. Despite the 10-year U.S. bond yield falling below 1.5%, a one-month low, gold bulls remained on hold, with bulls worried that inflation will be detrimental to gold prices tonight.
Silver recovered slightly. Not too dissimilar to gold’s slight pressure, silver did not give back too much of its gains after hitting an intra-day high of $27.98, eventually closing up 0.4% for the day.
The euro rose and then fell. In non-U.S. currencies, the euro rose and then fell against the dollar, and finally fell back to near the 1.2170 level at the beginning of the session.
The deteriorating relationship between Britain and Europe weighed on the pound. Let’s look at the British pound again. The pound fell 0.3% against the dollar to around 1.4110, after rising to 1.4189 earlier. the pound fell after the UK and the EU failed to agree on a post-Brexit solution to trade issues in Northern Ireland and threatened each other in the standoff.
Bitcoin numbers rallied desperately. On the Bitcoin front, after a big drop, Bitcoin has seen another surge and has now risen above $37,000. Bitcoin was boosted by bitcoin becoming legal tender in El Salvador and foreign media reports that the Fed may inadvertently hold bitcoin junk bonds.
A surge in EIA gasoline inventories weighed on oil prices. Finally, a look at the oil market. U.S. oil retreated slightly during the day and is now trading below the $70 mark. U.S. EIA data showed crude oil inventories plunged 5.2 million barrels in the week ended June 4, but consumption fell to 17.7 million barrels per day from 19.1 million barrels per day in the previous week due to weak demand and a sharp increase in gasoline and other refined products inventories. This overshadowed the prospect of a strong rebound in demand during the summer driving season. Some investors also believe that this could be an early warning sign when economic activity reaches its peak, but it is too early to draw conclusions.
[Risk Warning].
U.S. real interest rates are low Gold still has upside momentum
Credit Suisse noted that gold is back testing its 200-day SMA, but upside is more likely because gold prices will benefit from lower real interest rates in the US. The bank expects gold to encounter strong resistance in the $1,943-$1,966 range, but does not rule out the possibility of breaking out of the range and even expecting to return to a new all-time high of $2,075 an ounce. However, if gold prices fall below $1,841 an ounce, it may turn sideways in the short term.
Inflation concerns have receded, supporting the U.S. bond market
U.S. 10-year Treasury yields fell below 1.5% for the first time since a month. Market analysts say this indicates that the Fed’s assurances that rising inflation may be a temporary phenomenon are gaining acceptance among investors. A growing number of investors believe the job market is not improving to the extent expected at this time. This supports the U.S. Treasury market.
New Zealand economy may be strong New Zealand dollar is expected to be supported
The New Zealand Federal Reserve last month expected the economy to contract by 0.6% in the first quarter, which would put the economy into recession. But reports on manufacturing, wholesale trade and construction over the past week paint a stronger economic picture, and analysts at both the Bank of New Zealand and ANZ have revised their New Zealand GDP estimates for the first quarter upward. The Bank of New Zealand said GDP is likely to grow 0.8 percent from the previous three months, and ANZ now expects growth of 0.5 percent. Both previously expected no growth. GDP may see a good performance, which will support the New Zealand dollar.
[Key Outlook].
TBD OPEC crude oil production expected to increase in May
First, let’s focus on the monthly crude oil market report to be released by OPEC. Last month, OPEC released its monthly report showing that OPEC crude oil production increased by 30,000 barrels per day to 25.08 million barrels per day in April. Meanwhile, OPEC said it raised its crude demand forecast as U.S. crude supplies slumped.
By the end of the month, a Reuters survey showed OPEC’s oil production rose by 280,000 barrels a day in May from a year earlier to 25.52 million barrels a day, with the implementation rate of production cuts falling to 122 percent from 123 percent in April.
Last week, OPEC+ left its July production increase unchanged, with a possible increase of 841,000 barrels per day, and Saudi Arabia’s energy minister gave an optimistic view of the global recovery. OPEC+ will face tougher choices as market supply tightens and a supply-demand gap is likely to emerge later this year.
19:45 ECB may maintain the size of bond purchases
Then, come focus on the ECB’s interest rate resolution announcement. As Europe accelerates vaccination and economic reheating, there was once speculation that the ECB may announce a reduction in the scale of bond purchases on the latest resolution, but a number of officials recently refuted this claim, and economists revised their forecasts that the ECB’s accelerated pace of bond purchases will continue into the third quarter. HSBC Economics stressed that the European economy has just begun to move toward recovery, and inflation is still below target, it seems too early to start scaling back bond purchases. UBS economists also pointed out that the European Central Bank is expected to remain cautious and continue to ease money. In addition, bond purchases at the current pace can also support the goal of providing favorable financing conditions.
Analysis expects that the ECB will agree to keep the size of its monthly emergency anti-epidemic bond purchases at about 85 billion euros in the third quarter, and the central bank is unlikely to make significant changes to its economic forecasts.
You can keep an eye on the ECB’s inflation forecast. Nomura Securities expects the ECB to significantly raise its inflation forecast for 2021, but implies that medium-term inflation expectations remain well below the target level. Combined with rising sovereign bond yields, this should be enough to keep the ECB’s dovish tone in this resolution.
20:30 Lagarde may maintain a dovish tone
This will be followed by a speech by ECB President Lagarde. In the last month she said that the economic recovery remains uncertain, that the rise in inflation this year is temporary and that inflation fundamentals are not yet in a state of sustained high inflation; that the ECB is committed to maintaining favorable financing conditions during the economic recovery and that supportive policies will remain necessary in the coming months. It is unlikely that her stance will change much in the near future.
Based on this, we believe that Lagarde will emphasize that higher inflation is temporary and will maintain accommodative monetary policy and maintain the current scale of bond purchases. The ECB’s moderate stance could see the euro erase some of the gains made against the dollar since last week.
20:30 U.S. initial claims expected to continue to move lower
Eyes turn to the U.S. to see the U.S. will release initial jobless claims. In recent weeks, the number of initial claims released in the U.S. has continued to move lower, with last week’s release coming in at 385,000. Agencies commented that the initial claims number indicates that the labor market is still strengthening despite the labor shortage limiting hiring. Companies across all industries and regions are now reporting difficulty finding workers.
Currently, the market expects that the U.S. initial jobless claims for the week to June 5 will be 370,000. If the published value is much higher than expected, the dollar index may be under pressure; conversely, if the published value is less than expected, the dollar index may be stronger.
The market is generally expected to further reduce the number of initial jobless claims, which will have some support for the dollar index.
20:30 U.S. May CPI is expected to continue to strengthen
Finally, take a look at the monthly CPI rate for May to be released in the US. Last month’s April unadjusted CPI annual rate, recorded 4.2%. CNBC pointed out that the overall CPI in April hit the highest since 2008. Overall energy prices rose 25% from a year ago, with gasoline prices up 49.6%. In addition to higher prices, a major reason for the sharp rise in the annual rate is the base effect, which means that with the widespread shutdown of the U.S. economy due to the new crown epidemic, inflation levels in 2020 are very low and CPI may continue to be influenced by this factor in the coming months.
Currently, the market expects the U.S. un-quarterly CPI annual rate of 4.7% in May, which may be positive for the dollar if the published value is larger than expected; conversely, it will be negative for the dollar.
In addition, the monthly CPI rate will also be released at the same time, and the market is expected to be 0.4%. If both sets of data are said to be strong, the dollar index may strengthen.
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