The dollar was firm on haven demand amid the toxic mix of rising costs and slower growth. Risk sensitive currencies such as the Australian dollar weakened. Oil, one of the commodities stoking price gains, retreated below $US120 a barrel.
China weighs on markets
Markets are also contending with COVID-19 outbreaks in China, where Beijing and Shanghai resumed mass virus testing. The fear is China’s COVID-zero strategy will lead to repeated lockdowns that damage both its economy and global supply chains. The latter are also being affected by the war in Ukraine.
“At some point financial conditions will tighten enough and/or growth will weaken enough such that the Fed can pause from hiking,” Goldman Sachs strategists including Zach Pandl wrote in a note.
“But we still seem far from that point, which suggests upside risks to bond yields, ongoing pressure on risky assets, and likely broad US dollar strength for now.”
The US consumer price index rose 8.6 per cent in May from a year earlier, a fresh 40-year high, in a broad-based advance, adding to a slate of troubling inflation data globally. Many investors expect half-point Fed rate rises this week and again in July and September. Barclays and Jefferies said an even bigger 75-basis-point move was possible at the June meeting.
No smooth ride
The volatility in Treasuries “can’t be anything that any central bank would welcome,” Sonal Desai, Franklin Templeton’s fixed income chief investment officer, said on Bloomberg Television.
“We’re going to see more of the same. It’s not going to be a nice, smooth grind upwards. The Fed is going to need to do more.”
The yen edged lower and remains near a 24-year-low against the greenback on the stark policy contrast between a hawkish Fed and a still dovish Bank of Japan. Senior Japanese officials delivered a ramped-up warning on the yen Friday, seeking to keep a floor under the currency.
Poor sentiment was evident over the weekend in a cryptocurrency slide that dragged bitcoin as low as $26,877, the weakest since mid-May.
In Australia, financial markets are closed for the Queen’s birthday holiday.
What to watch this week
- First WTO ministerial meeting in nearly five years. Through June 15.
- ECB’s Luis De Guindos due to speak, Monday.
- US PPI, Tuesday.
- China key economic activity data, liquidity operations, medium-term lending facility, Wednesday.
- FOMC rate decision, chairman Jerome Powell briefing, US business inventories, empire manufacturing, retail sales, Wednesday.
- ECB President Christine Lagarde due to speak, Wednesday. Bank of England rate decision, Thursday.
- US housing starts, initial jobless claims, Thursday.
- Bank of Japan policy decision, Friday. Eurozone CPI, Friday.
- US Conference Board leading index, industrial production, Friday
Key market moves
- S&P 500 futures fell 0.8 per cent as of 7:13am in Tokyo.
- The S&P 500 fell 2.9 per cent
- Nasdaq 100 futures fell 1.2 per cent.
- The Nasdaq 100 dropped 3.6 per cent
- Nikkei 225 futures shed 1.8 per cent
- Hang Seng futures declined 1.7 per cent
- The euro was at $1.0505, down 0.1 per cent
- The Japanese yen was at 134.49 per dollar, down 0.1 per cent
- The offshore yuan was at 6.7424 per dollar, down 0.1 per cent
- The yield on 10-year Treasuries advanced 11 basis points to 3.16 per cent
- West Texas Intermediate crude fell 1.4 per cent to $119 per barrel
- Gold was at $1877.96 an ounce, up 0.4 per cent