The June rate hike needle has been moved precipitously lower

Markets

Even though equity market investors had, for the most part, looked through the debt ceiling drama, US stocks still rallied in relief rally fashion as investors revelled after perhaps one of the most significant economic downside risks of the year had been skirted

Adding to the positive cross-asset vibe, dovish comments from Fed governor Philip Jefferson and Philadelphia Fed president Patrick Harker influenced the implied June Fed hike needle precipitously lower back to about 30 percent from a 67 percent chance a day ago. Fed Jefferson has been nominated for vice chair and now carries a big stick. 

With the core of the committee seemingly on board with a June skip, the dovish Fed repricing of the June FOMC meeting catalyzed a modest move higher in global equities, some dollar weakness, gold upside and even a rally in beleaguered oil markets.

The good news for risk markets is the Fed seldom, if ever, surprises the market Fed expectation pricing going into a meeting.

But to the extent this rally sticks with investors reverting to the innumerable concerns that have ailed sentiment this year is highly debatable. Indeed a world where markets begin to worry about growth again suggests more downside for equities, a broadly stronger US dollar and lower commodity prices.

European traders cheered after official data showed eurozone-wide inflation decelerated more than expected, falling to 6.1 percent in May, its lowest level since Russia's full-scale invasion of Ukraine.

In Aisa, a better-than-expected Caixin Manufacturing PMI survey which came in contrast to Wednesday's disappointing NBS business sentiment survey helped stabilize a wobbly ship for the time being.

The divergence between the two PMIs could be related to potential geographic coverage differences, sector bias, and survey timings. 

The Caixin PMI is from earlier in the month, so NBS should be closer to the latest sentiment. Either way, one stronger PMI print will unlikely influence the negative sentiment around China's current growth trajectory. 

Forex

A June skip could weigh the Dollar on the margin from the US leg, similar to what a slowing in Fed easing argument entails. But for the US dollar to weaken more broadly, the TWI must be driven by the most prominent dollar challengers, EUR and CNY, which recovered overnight. But ultimately, that means more robust growth in Europe and China.

Hence the pullback in the Dollar could be due to a mini “risk on” revival where the Dollar usually takes the back seat.

We do not think the ECB and the FED are in that much of a different place, just that the ECB is slightly behind. And with China data continuing to disappoint and driving sentiment weaker, we think FX fundamentals will likely continue to trend in a currency-negative direction for the Yuan, keeping crosses with a high sensitivity to CNY also under pressure.

The MYR is one of the most China-sensitive currencies in the region and has thus weakened, given disappointments in China activity data. MYR is still cheap and a long-term winner from supply-chain diversification and semiconductor decoupling, but there is room for short-term losses if US economic data remains strong.

Oil

Oil markets are in the OPEC+ meeting window, and short sellers will naturally cover, sensing the lower prices will go, the more likely OPEC+ will intervene.