Markets have been generally drifting with FX, equity markets and bond yields trading in contained ranges. The short end of the US Treasury curve edged a little higher.  As we go to print, the AUD/USD is trading in its recently familiar 0.7222/25 range with little movement in key yield differentials, base metals a touch softer, somewhat higher equity market volatility (the VIX rose 0.62 to 15.82) and a sharp move back in iron ore prices in China yesterday, dimming buyer appetite in the background.

Spot iron ore fell back $3.67 on the day to $51.22 (-6.69%), the lowest since 3 March, amid weakness yesterday in Dalian iron ore futures (down 2.79%) and Chinese steel rebar futures (down 2.27%).  There is no key AU data today, but there are some “remarks”/Q&A from the RBA Governor at lunchtime that the market will have to chew over.

There have been two more Fed speakers overnight, James Bullard, hawkish and a voter this year, and John Williams, a non-voter this year and generally regarded as more at the dovish end of the policy spectrum.  Bullard was downplaying the influence of the proximity of the Brexit poll (June 23) to the June 15 FOMC, saying that the probability of an exit vote has fallen somewhat recently, speaking at a financial forum in Beijing late yesterday afternoon.  He also noted that even in the event of the UK leaving the EU “the next day nothing happens” with departure negotiations then to go “very slowly”.  Because of these factors, he doesn’t expect it to influence the FOMC’s decision.

John Williams was a little more circumspect but far from an outright dove, saying that he doesn’t know what the Fed will do in June, with the Fed facing many uncertainties such as Brexit.  What did catch the market’s attention is that he expects 2-3 rises this year and maybe 3-4 next, way more than market pricing of one for this year and next.

Get set for June or July is the clear message from the Fed.  Yields along the Fed futures curve rose a further 1-2 bps, the probability of a June 15 move at 30%, increasing to a 54% by the July 27 FOMC meeting.

The preliminary Euro-zone/German/French PMIs for May were about the only data of significance released overnight.  They revealed little change in the Manufacturing PMI (51.5 from 51.7) and an unchanged services reading at 53.1, both almost bang on expectations.  Germany’s readings were a touch stronger, France’s a touch lower but also somewhat better overall, the Manufacturing PMI still below 50 at 48.3 after 48.0 in April, services at 51.8.  There was weakness outside the core, Markit the survey owner, reported.

Coming up

First up is a speech from Fed President Harker at 8.30, potentially more US rate view wire stories.  It’s hard to see anything else on the scheduled calendar today ahead of RBA Governor Stevens’ “Remarks”/Q&A at lunchtime today (13.05 AEST).  There’s also another weekly ANZ-Roy Morgan Consumer Confidence update.  Of course the market will be very interested in any comments the Governor is prepared to offer on inflation and policy tolerance around the inflation outlook.

For Kiwi dollar followers, keep in mind that the first forecast milk price payout forecast from Fonterra for 2016-17 is expected this week, but possibly later this week we understand from our colleagues across the ditch.

Tonight, more focus at least initially on Europe with another update to (and possible revision of) Germany’s Q1 GDP and the ZEW Investor Survey (the Survey also for the Eurozone).

It’s a fairly light night as far as the US data schedule is concerned with New Home Sales for April the main data point, but unlikely to have any material impact on the outlook for the Fed and the USD, unless it’s an especially left field print.

Overnight

On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years -0.52bp to 1.83%. On commodity markets, Brent crude oil -0.57% to $48.44, gold-0.2% to $1,250, iron ore -6.7% to $51.22. AUD is at 0.7224 and the range was 0.7195 to 0.726.

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• Markets Today: 24 May 2016 (PDF, 1MB)

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