The US non-manufacturing ISM is forecast to increase from 62.7 to 63.1

Markets

“Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months”. The Fed’s latest Beige Book delivered the expected/feared for anecdotical evidence that the current increase in prices could at least partly become structural. The preparatory document for the upcoming June 16 FOMC meeting also noted that the national economy expanded at a moderate pace from early April to late May, which was a slight acceleration compared to the previous period. The document is also filled with stories from companies willing to hire, but failing to attract personnel. Developments prompted Philly Fed Harker (see below) to join the chorus of FOMC voices speaking out in favor of starting the QE tapering debate in the coming week (ie June FOMC meeting). While it obviously takes some time and thought to start winding down asset purchases running at a monthly $120bn pace and piling on to a $8tn balance sheet, it’s more straightforward to take action on the much smaller Secondary Market Corporate Credit Facility. And that’s what the Fed effectively did yesterday. The Fed aims to sell this $13.7bn portfolio gradually and orderly by the end of the year. It will start with ETF holdings with the selling of corporate bonds to begin late in the summer. Financial markets reacted again stoic to developments. US equity markets for a second day running opened pretty strong, but fainted somewhat going into a near break-even close. US yields dropped by 0.2 bps (2-yr) to 1.9 bps (10-yr). Daily changes on the German yield curve were similar. The dollar started the day on a better footing but closed unchanged around 89.90 for DXY. EUR/USD finished at 1.2211.

Asian stock markets mostly gain around 0.5% this morning. The Caixin Chinese services PMI declined from 56.3 to 55.1 in May but is ignored. Core bonds tread water while the dollar is a better bid. The focus of today’s economic agenda is again in the US with ADP employment change, US non-manufacturing ISM, and another bunch of Fed speakers. Consensus expects a 650k job gain in May, but the standard deviation amongst analyst calls is rather large. Last month also showed a +-500k gap between the ADP report and payrolls, making it a tough call. The storyline and conclusions might point in the same direction though. A strong outcome will convince those FOMC members still in doubt of sufficient labour market strength to start thinking about a return to normal, while a weak outcome will highlight the recent debate as to whether the labor market actually is already tighter than some indicators suggest. The US non-manufacturing ISM is forecast to increase from 62.7 to 63.1. Details will be crucial. The split between good demand, supply struggles, and difficulties to hire suggests lower UST’s and a softer USD (inflation channel).

News Headlines

Harker said it may be time to “think about thinking” about tapering. According to the Philadelphia Fed President, the Fed should “slowly, carefully” scale back the purchases at the appropriate time. Harker is not the only one to have started a U-turn away from keeping policy extremely easy no matter what. Bullard earlier this week said the labor market is tighter than it seems. Dallas Fed Kaplan recently signaled the debate should start sooner rather than later and vice-chair Clarida mentioned back in May that tapering should be discussed in “upcoming meetings”.

The EU is mulling to make steel, cement, and aluminum importers pay for greenhouse gas emissions. It is expected to unveil proposals on a mechanism that will tie the levies to similar costs domestic producers face already today. The importers would have to buy special certificates for a price that is linked to the EU Emissions Trading System.

The fifth round of Iranian nuclear talks wrapped up on Wednesday and are probably adjourned for a week. Chief coordinator of the talks Enrique Mora is sure that in the next round a deal will be struck. Others are more cautious saying the most difficult decisions lie ahead. Time is running out though with Iranian presidential elections scheduled on June 18 that could break the momentum. Iran’s top nuclear negotiator said the remaining differences are not insurmountable. Oil prices rise further this morning, north of $71/b (Brent).

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