USD Index Holds Strength

CURRENCY FUTURES

The US dollar index strengthened Tuesday and held strength through overnight trade, boosted by hopes of a US-EU trade deal and improved US consumer confidence.

Euro futures are lower, pressured by dollar strength. French GDP grew less than expected at an annualized rate of 0.6%, below forecasts of 0.8%. Germany’s unemployment rate remained unchanged; however, seasonally adjusted jobless claims grew by 34,000 in May, higher than April’s 4,000.

British pound futures are lower, driven by dollar strength but, remain near three-year highs. Improved market sentiment, strong retail sales data published Friday, and reduced bets on the Bank of England to cut rates have contributed to the pound’s strength in recent days. UK retail sales rose 1.2% in April, the fourth consecutive monthly increase, showing consumer resilience despite tax hikes and trade tensions. Inflation in the region remains elevated at 3.5%, higher than expectations for the Bank of England. Markets are expecting the central bank to hold rates steady at its June meeting.

Australian weighted CPI came in hotter than expected at 2.4% vs. an expected 2.3%, matching last month’s figure. The weighted CPI report is heavily focused on goods rather than services and usually does not have significant bearing on policy rates. Markets are pricing a 67% probability the Reserve Bank of Australia will cut rates at the July meeting, with a total of 80 bps of easing this year.

Japanese yen futures continue lower following reports that Japanese authorities may intervene in the bond market by reducing bond issuance after a recent sell-off drove yields to record highs. Japan’s finance ministry sent a questionnaire to market participants Monday evening asking for their views on issuance and the current market situation. Investors took the move as a sign that authorities are seeking to stabilize the bond market.

INTEREST RATE MARKET FUTURES

Futures slipped in overnight trade after finishing higher across the curve Tuesday. Longer-dated yields rose overnight as weak demand at Japan’s 40-year government bond auction spilled over to other markets. Tuesday saw yields lower in response to reports that Japanese authorities were considering adjusting their bond issuance plans after a sell-off drove yields to their highest levels in years. The potential for lower issuance sent investors over to the US Treasury market.

Worries over a gaping budget deficit and overall trade uncertainty remain in the Treasury market as investors are demanding a higher premium for holding onto longer-term bonds. Most of the selling in the bond market has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.

The FOMC will release their minutes from last month’s meeting at 1:00 p.m. Central Time today, offering clues as to the bank’s future monetary policy path. The Fed is widely expected to hold rates steady at its June and July meetings, with the first rate cut coming in September. April PCE inflation figures are due Friday.

The Treasury Department will auction $70 billion in five-year notes today. Yesterday, the Treasury auction for two-year notes fetched a yield of 3.95%.

The 10-year Treasury yield is 4.45%, and the 30-year yield is hovering around 4.95%. The spread between the two- and 10-year yields is 49 bps, unchanged from Tuesday.

STOCK INDEX FUTURES

Futures held steady in overnight trade after rallying across all major indexes Tuesday, boosted by a risk-on sentiment following rising hopes for a US-EU trade deal after President Trump announced the US would delay implementing 50% tariffs on the EU. Consumer confidence rebounded in May after five consecutive months of declines; May’s consumer confidence index climbed to 98 in May, much higher than April’s 85.7 and the expected reading of 87.1. The cutoff date for results was May 19^th, so the index did not capture any recent developments.

Tech giant and member of the “Magnificent Seven,” Nvidia, will report earnings after the bell on Wednesday. Nvidia represents approximately 7% of the S&P 500’s weight and roughly 11% of the Nasdaq-100. Investors will be paying close attention to the company’s outlook as the US has recently banned sales of its high-tech chips to China, where the company generates a lot of business.

Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 23 times their expected earnings over the next 12 months, as of Tuesday’s close, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the many uncertainties surrounding the economic outlook, primarily the still-unfolding consequences of the Trump administration’s trade policies.

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