Another Fed member hints at tapering discussion moving closer

Market movers today

Markets await the US employment report tomorrow as the Fed has been clear employment is the key variable to determine when it is time to signal to taper of asset purchases.

As a warm-up today we have US ADP employment. Note, though, that it is rarely a good indicator for non-farm payrolls.

ISM non-manufacturing and service PMIs across Europe are also released. Look for strong data on the back of high activity in manufacturing and re-opening of service-related businesses.

The 60 second overview

Fed policy: The Fed's Patrick Harker yesterday said "it may be time to at least think about thinking about tapering". He added, though, that "we will remove accommodation carefully and methodically as the economy continues to strengthen...Our goal here is to be boring." He is the third member to suggest that the tapering discussion is likely to come up soon after similar comments from the more influential member Fed Vice Chairman Richard Clarida as well as FOMC Board member Randal Quarles. Despite the comments, the Fed has so far succeeded in being boring as bond yields have reacted little to the twist in comments. US 10-year yields drifted lower again yesterday.

Beige book: The Fed's beige book yesterday confirmed the picture of current price pressures: "Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months" the survey said. The report also confirmed that labour demand is strong but that the supply of labour is constrained.

Commodities: The oil price rose further overnight to just below USD 72 per barrel, the highest level in two years. It follows a period of moving broadly sideways since March but demand is now about to pick up with travelling going up over the summer. Industrial metals continue to take a break from the strong rally, though, as copper and aluminium prices drift lower.

Equities: Equities were mostly higher in Wednesday trading. No clear preference on styles and risk with both growth, value and cyclical on the winners and losers list. In turn, US index performance were very aligned with S&P 500 up 0.2% and Dow, Nasdaq and Russell 2000 all up 0.1%. Once again, energy was the big gainer, along with tech and real estate. Optimism visible in Asia this morning, with all markets higher but South Korea leading the gains. US futures point to a more muted opening, yet in green.

FI: Euro bond yields trended lower through most of yesterday's trading session. The key pointers for the market near term is tomorrow's US labour market report and the ECB meeting on next Thursday. Today, the ECB General Council members enter into the silent period where they are not allowed to discuss monetary policy, see our ECB preview - The first step to a soft exiting while keeping flexibility.

FX: EUR/USD remains range-bound, as the cross remains stuck around 1.22 amid a vacuum in key data/surprises. In Denmark, inflow to Denmark's FX reserve continued in May and at a higher pace. EUR/DKK still trades close to the 7.4360 intervention level so more could follow in June. We stick to our call of a 10bp rate cut - possibly within the coming month - and for EUR/DKK to bounce above 7.4400 after a cut.

Credit: Credit markets continued to show strength yesterday where iTraxx Xover tightened 1½bp (to 243½bp) and Main tightened marginally (closing in 49bp). HY bonds tightened 2bp and IG tightened marginally.

Nordic macro and markets

Sweden: Service PMI for May is published at 08.30 CET. Interesting to see if a similar peak appears which the manufacturing figures indicated earlier this week. Note, however, that these are May figures, which means that recently eased restrictions are not captured. The service PMI for the Swedish part has, however, held up well despite the high spread of infection and has since the drop (Feb-Apr 2020) followed the US. However, the United States is well ahead of us in terms of vaccination and reopening, which means that it is not unreasonable for a discrepancy to be seen now.

In Norway, we get house prices for May. We have been expecting them to level off, driven by a better balance in the market thanks to increased supply, expectations of rate increases, and already high price levels so price expectations have turned. Hence, we expect more or less unchanged prices in May although the OBOS-prices released on Tuesday imply a marginal upside risk.