INTEREST RATE MARKET FUTURES
Futures are higher across the curve but lost some strength after May’s retail sales data was released. Focus this week will center around any signals from the Fed on when the central bank will cut interest rates. Markets are pricing in a 56% chance of a 25 bps rate cut in September and an 82% chance of 25 bps of cuts by October. The Fed will update its summary of economic projections as well, with investors paying close attention to signals from the bank on the broader economic outlook.
Monday’s 20-year bond auction was met with strong demand, fetching a yield of 4.942%, right on top of market expectations. The bid-to-cover ratio was 2.69 ($2.69 in bids for every $1 of bonds), above the six-auction average of 2.63. Dealers, who are required to bid at the auction, took home 13.4% of the auction, below average, indicating strong user demand. Despite the strong auction, bond prices fell across the curve on Monday as reports that Iran wants an end to hostilities and a resumption of talks over its nuclear program circulated among major news outlets. Despite the reports, Israeli Prime Minister Benjamin Netanyahu said the attacks will continue until Iran’s nuclear program is destroyed. $23 billion in five-year Treasury Inflation-Protected Securities will be auctioned midday Tuesday.
The 10-year Treasury yield is 4.42%, and the 30-year yield is 4.93%. The spread between the two- and 10-year yields is unchanged from Monday at 46 bps.
STOCK INDEX FUTURES
Stock index futures are lower as retail sales data showed a sharp contraction of consumer spending and as hopes for a quick resolution to the Israel-Iran conflict faded after President Trump played down a prospect for a truce between the two countries.
Retail sales in May shrank -0.9% from April, lower than expectations of a -0.5% fall in spending and a falloff from April’s growth of 0.1% as consumers grow anxious over the larger economic picture and look to hold onto their wallets. May sales excluding auto and gas declined -0.1%, showing the drop in sales was largely attributed to consumers laying off auto and gas purchases after splurging in previous months to get ahead of tariffs. Economists had expected a 0.3% rise. Many businesses stockpiled items to get ahead of Trump’s tariffs, and price increases are expected to show up later this summer or in the fall.
Industrial production figures for May will be released later this morning, followed by May housing starts and weekly jobless claims on Wednesday. Industrial production is expected to show no growth since April. The Fed will also meet this week, with the bank expected to hold rates steady while also updating its summary of economic projections.
President Trump said on Tuesday that Japan was being “tough” in trade talks and the European Union has failed to offer a fair deal. Trump also added that pharmaceutical tariffs will be “coming very soon.” Meanwhile, President Trump and Prime Minister Kier Starmer signed a limited trade agreement between the US and UK on Monday, lowering tariffs on British car and aerospace imports. However, tariffs regarding steel and aluminum remain unresolved.
Stock valuations are still relatively high by historical standards; the S&P 500 was trading near 23 times its expected earnings over the next 12 months as of June 13, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.
CURRENCY FUTURES
The USD index edged higher despite a weak retail sales data reading as the dollar advanced against most major currencies. The Fed is widely expected to hold rates steady this week, but markets will be analyzing the bank’s summary on economic projections for insights into how policymakers view the broader economic outlook.
Euro futures are lower on dollar strength. German economic confidence rose again this month, with the ZEW Indicator of Economic Sentiment rising 22.3 points month-over-month to 47.5 in June. The improvement in confidence is likely linked to a loosening of fiscal restraints by the new government, which is also expected to heavily increase defense and infrastructure spending. The reading also grew for the larger eurozone region as a whole, with a reading of 35.3 for June, a sharp increase from the 11.6 recorded in May. Wages in the eurozone grew at 3.40%, over expectations of a 3.20% growth, although the figures are down from a 4.10% increase the previous quarter and marked the slowest pace of wage growth since Q3 2023. CPI inflation figures will be released early Wednesday morning, with an annualized rate of inflation of 1.9% expected. Additionally, the Eurogroup meeting of eurozone finance ministers will begin on Thursday.
British pound futures fell against a stronger dollar. Focus will center around the Bank of England’s meeting on Thursday, where the bank is widely expected to hold rates steady at 4.25%. Investors will watch for signals and commentary on when rates may fall again. Recent data out of the UK has pointed to a slowing economy, with GDP in April contracting -0.30% while unemployment ticked up. Inflation in April grew to 3.5% and is expected to remain elevated for the time being. Markets are expecting the BoE to cut rates again in September, while some expect a solid chance of an earlier cut in August. UK CPI inflation figures will also be released Wednesday, with annualized inflation expected to come in at 3.3%.
Japanese yen futures are lower after the Bank of Japan left its benchmark interest rate unchanged Tuesday and also announced that it would slow the pace of its bond-buying reduction after April 2026. The central bank held rates steady at 0.5%, where it has remained since January; BoJ Governor Kazuo Ueda said the bank will consider further interest rate increases when certain economic conditions are met. The bank also reaffirmed its plan to cut Japanese government bond purchases by ¥400 billion each quarter through March 2026. Starting in April 2026, the reduction will shift to ¥200 billion per quarter.
Australian dollar futures dropped against a stronger dollar. Labor data due Thursday is expected to show 25,000 new jobs and an unemployment rate holding steady around 4.1%. Recent labor data has shown resiliency, casting doubts on a July rate cut from the Reserve Bank of Australia.
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