Markets pricing in a September/October Fed rate hike

The Day So Far

We have seen some mildly bearish action for European equity markets this morning as Junker’s comments over the weekend highlighted the gap that still remains between Greece and their creditors in terms of getting a deal done. This followed Tsipras’ comments on Friday where he described some of the creditor demands as ‘absurd’. So the Grexit risk lingers on with the new IMF payment deadline now at the end of June meaning that Greek headline risk should continue to keep European equities under pressure.

Elsewhere, EURUSD popped higher early on this morning in a move that saw some of the Non-Farm Payrolls induced Dollar strength given back. Up until Friday the Euro had a very strong week following the higher than expected inflation numbers announced on Tuesday. However, the US Dollar then temporarily spiked around 9am after a US official said that Obama did not say that a strong USD was a problem. This move created downside for both EURUSD and GBPUSD with the latter making new lows. However, this comment is not likely to play a major role in shaping price action this afternoon.

T-Notes have had a quiet morning chopping around the mid point of Friday’s Non-Farm Payrolls sell off. The Bund had a go at driving lower at 8.30am but has since reversed to be unchanged on the session.

Crude oil has been confined in a tight range so far just below the $59 handle, which is also the mid point of the range seen over the last month. Direction from here is a tough call.

The Afternoon View

We expect a quiet afternoon as is normally the case in the US session that immediately follows Non-Farm Payrolls Friday. There is no US data of any note on the calendar. We have a very mild negative bias across all markets in this report. We expect the S&P to favour the downside with a test of Friday’s low possible. The timing of the Federal Reserve’s rate ‘lift off’ has been brought forward by Friday’s very bullish 280k Non-Farm Payrolls print. September/October is now being priced in with the average hourly earnings figures on Friday also beating expectations. The Amplify view is that the drop in momentum of US growth in the first five months of 2015 will see the Fed err on the side of caution and not hike before year end. But for now Sept/Oct expectations will likely shape market behaviour.

Due to these Fed rate hike expectations we anticipate the US Dollar to remain firm and T-Notes to remain under pressure. We expect both EURUSD and T-Notes to drift back to Friday’s lows. If the Dollar does stay firm then we anticipate crude oil prices to also move to Friday's lows.