Market wrap: US data supported Fed's rate hike forward cycle - Westpac

In a market wrap, analysts at Westpac explained that US data continues to support the Fed’s outlook for ongoing interest rate rises. 

Key Quotes:

"The Philadelphia Fed May business survey rose to cyclical highs at 34.4 (expected 21.0, previous 23.2), with virtually all current components stronger. Prices received were notably stronger, and both employment (30.2 from 27.1) and workweek (34.4 from. 21.6) showed a decidedly firmer outlook for the labour market than a few months ago.

EUR/USD ranged between 1.1775 and 1.1840. Italy’s 5 Star and Lega agreed their main policies and so moved closer to forming a coalition. Individual party members should vote on the agreement tomorrow and so a coalition could be affirmed by President Mattarella early next week.

US and Chinese officials met in Washington, DC. President Trump said that he doubts the talks will be successful because China and the EU have become “spoiled” from taking advantage of the US.

Optimism over the US-North Korea summit also faded a little further as Trump said “If you look at that model with Gaddafi, that was a total decimation. We went in there to beat him. Now that model would take place if we don’t make a deal, most likely.” Of course, national security adviser Bolton had argued that the Libya model of a verified end to its nuclear program in return for economic benefits was an attractive idea, not a threat.

USD/JPY rose from 110.20 to 110.86 – the highest since January- helped by higher US treasury yields. AUD/USD’s Sydney session rally to above 0.7540 petered out to the 0.7500 area. NZD fell from 0.6938 to 0.6873 (yesterday’s Budget did not have any impact on the currency). AUD/NZD rose from 1.0900 to 1.0940 before settling around 1.0920.

Fedspeak involved Kashkari (dove), who said low wage growth is a conundrum; and Kaplan (centrist/hawk), who said the economy is at or past full employment. The US 10yr treasury yield rose from 3.10% to 3.12% which is a fresh high since 2011, though this occurred well before the strong US data. 2yr yields rose 1bp to 2.60% - the highest since 2008 – before slipping to 2.57%. Fed fund futures yields predict a rate hike in June, plus at least another by year end."