European and US equities have continued to edge higher amid a mild risk positive tone in the overnight session. US Treasury yields had a small sell off at the start of the NY session with the move higher in yields helping the USD perform across the board. Commodities had another mixed session, but oil prices have continued to climb higher ahead of OPEC meeting on Thursday. There has been little market reaction to Trump’s budget, but questions remain on optimistic growth assumptions.

Solid data releases out of Europe help reverse yesterday’s mild risk off tone triggered by the heart breaking news of a terrorist attack in Manchester. The German Ifo business climate index rose to a new all-time high – based on data back to 1991 while French services and German manufacturing flash May PMI readings also beat expectations. Notably, however, Europe’s composite PMI reading was unchanged at 56.8, suggesting there may have been some offsetting weakness in other EZ countries that do not report flash estimates. Still reaction to the data saw European equities ex UK performed and helped the Euro climbed to an intraday high of 1.1268.

The positive mood in Europe helped US equities at the open with financial shares leading the way.  After four consecutive gains, the S&P 500 climbed 0.2% overnight and now is within touching distance of its closing record of 2405.77. The Dow and NASDAQ also recorded modest gains on the day, up 0.21% and 0.08% respectively.

Just after the US open, 10y UST yields jumped over 5bps to an intraday high of 2.2869% and are currently trading at 2.2817%.  Corporate issuance and a soft T bill auction were been cited by some as the trigger for the move higher in yields. Countering this argument, the 2 year bond auction was well received and we suspect the move probably has more to do with US equity performance and the ongoing rise in oil prices.

The move higher in UST yields has helped the USD performed against most currencies with NZD the exception in G10 (+0.23%) and ZAR (1.09%) the notable winner in EM. The Kiwi got a boost early this morning form better than expected milk forecast from Fronterra ($6.50 17/18, adding 15c to current season). Meanwhile the Rand performance was triggered by reports that ANC Leaders plan to raise Zuma removal at a key meeting.

Looking at G10 currencies in more detail, the strength in the USD has dragged the Euro to the bottom of the pile, down 0.48% and back below the 1.12 mark. But after decent gains over the past fortnight (almost 4%), we suspect the move reflects some profit taking and bit of technical resistance above 1.1260. ECB’s Coeure might have been a factor too noting there is no need to change policy exit sequencing at this stage. Other European currencies followed the EUR move lower and JPY underperformed in line with the move higher in UST yields (currently trading at ¥111.78). Meanwhile the AUD is essentially unchanged seemingly aided by the risk positive tone (VIX still below11) and rise in oil prices (WTI +0.7% and Brent 0.5%), despite softness in gold (-0.8% and iron ore -1.9%).

Market reaction to Trump’s budget was fairly muted. The $3.6tr spending cuts over 10y were already know and in addition to the growth forecast assumption, question marks still remain on the White House ability to gain approval from Congress.

Coming Up

Australia’s Q1 Construction Work Done is the data highlight in our time zone, RBNZ Wheeler speaks in Hamilton (non- public speech), BoJ Kuroda speaks in Tokyo and Australia also gets Leading Index and Skilled Vacancies figures for April. In Europe Germany releases its Consumer Confidence reading for June and ECB Draghi and Praet are on speech duties.  House prices are out in the US and ahead of the May FOMC Meeting Minutes early tomorrow morning, the Bank of Canada makes its policy rate announcement.

In line with the market our economists’ are calling for Construction Work Done to print a modest 0.5% in real terms in Q1. Road and rail public infrastructure spending has been rising and should help moderate the wind-down in spending on major resource projects. That said, Cyclone Debbie in Queensland and the exceptionally wet weather in Sydney during March, the wettest in 27 years, likely dragged spending down during the quarter.

The Bank of Canada is unanimously expected to stand pat tonight, but with core CPI trending lower we suspect the Bank will retain its easing bias.

As for the FOMC Meeting Minutes we thnk they will reiterate the consensus view within the Committee for two more hikes this year. However, the market is likely to be sensitive to any commentary on the inflation outlook. A June hike still looks like the base case scenario, but if there are any signs of doubts over the expected upward path on inflation this view may be challenged.  After dipping into the mid-60s last week, pricing expectation for a June hike have edged higher again and currently sit at 75% while 35bps of tightening are priced by year end. Any commentary surrounding the Fed Balance sheet are likely to be limited to the Committee’s preference for a passive strategy without any details on timing or magnitude.

Overnight

On global stock markets, the S&P 500 was +0.18%. Bond markets saw US 10-years +2.62bp to 2.28%. In commodities, Brent crude oil +0.59% to $54.19, gold-0.8% to $1,251, iron ore -1.9% to $62.00, steam coal -0.6% to $74.35, met. coal +1.2% to $174.00. AUD is at 0.7477 and the range since yesterday 5pm Sydney time is 0.7466 to 0.7517.

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