The Federal Reserve reported on Tuesday the U.S. industrial production rose 0.8 percent m-o-m in May, following a revised 0.1 percent m-o-m advance in April (originally a 0.7 percent m-o-m gain).

Economists had forecast industrial production would increase 0.6 percent m-o-m in May.

According to the report, the manufacturing output went up 0.9 percent m-o-m, due mainly to a climb in motor vehicle assemblies. In addition, the mining production increased 1.2 percent m-o-m, while the output of utilities edged up 0.2 percent m-o-m.

Capacity utilization for the industrial sector increased 0.6 percentage point m-o-m to 75.2 percent in May. That was 0.1 percentage point above economists’ forecast but 4.4 percentage points below its long-run (1972-2020) average.

In y-o-y terms, the industrial output surged 16.3 percent in May, following a revised 17.6 percent jump in the prior month (originally a 16.5 percent climb) but it was 1.4 percent below its pre-pandemic level. 

U.S. stock-index futures were little changed on Tuesday, as investors assessed a huge batch of U.S. economic data, while awaiting the start of the Federal Reserve's two-day policy meeting later today.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

The Commerce Department reported on Tuesday the sales at U.S. retailers fell 1.3 percent m-o-m in May, following a revised 0.9 percent m-o-m increase in April (originally unchanged m-o-m). This was the first monthly drop in retail sales in three months.

Economists had expected total sales would decrease 0.8 percent m-o-m in May.

According to the report, sales at building materials and garden equipment (-5.9 percent m-o-m), autos (-3.9 percent m-o-m) and electronics stores (-3.4 percent m-o-m) recorded the biggest declines in May.

Excluding auto, retail sales dropped 0.7 percent m-o-m in May after a revised flat m-o-m reading in the previous month (originally a 0.8 percent m-o-m decrease), being worse than economists’ forecast of a 0.2 percent m-o-m gain.

Meanwhile, closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, and are used in GDP calculations, decreased 0.7 percent m-o-m in May after a revised 0.4 percent m-o-m decline in April (originally a 1.5 percent m-o-m fall). 

In y-o-y terms, the U.S. retail sales jumped 28.1 percent in May after a revised 53.4 percent climb in the previous month (originally a 51.2 percent surge).

The Labor Department reported on Tuesday the U.S. producer-price index (PPI) rose 0.8 percent m-o-m in May, following an unrevised 0.6 percent m-o-m increase in April.

For the 12 months through May, the PPI climbed 6.6 percent after an unrevised 6.2 percent surge in the previous month. That was the largest increase since 12-month data were first calculated in November 2010. 

Economists had forecast the headline PPI would increase 0.6 percent m-o-m last month and 6.3 percent over the past 12 months.

According to the report, nearly 60 percent of the May advance in the index for final demand can be traced to a 1.5-percent m-o-m jump in prices for final demand goods. In addition, the index for final demand services went up 0.6 percent m-o-m.

Excluding volatile prices for food and energy, the PPI went up 0.7 percent m-o-m and climbed 4.8 percent over 12 months (the largest advance since 12-month data were first calculated in August 2014). Economists had forecast gains of 0.5 percent m-o-m and 4.8 percent y-o-y.

The Canada Mortgage and Housing Corp. (CMHC) reported on Tuesday the seasonally adjusted annual rate of housing starts was at 275,916 units in May, up 3.2 percent from a downwardly revised 267,449 units in April (originally 268,631 units).

Economists had forecast an annual pace of 270,000 for May.

According to the report, urban starts rose by 1.8 percent m-o-m last month to 254,647 units, as multiple urban starts surged by 10.9 percent m-o-m to 190,530 units, while single-detached urban starts tumbled 18.0 percent m-o-m 64,117 units. At the same time, rural starts were estimated at a seasonally adjusted annual rate of 21,269 units.

GBP fell against most of its major counterparts in the European session on Tuesday as investors looked past strong UK’s employment data, taking a cautious stance ahead of the start of the U.S Federal Reserve’s policy meeting later today.

The Office for National Statistics (ONS) reported the number of people in work in Britain rose by 113,000 to 32.49 million in three months to April, missing market forecasts of a 150,000 increase. The quarterly advance in employment was mainly driven by an increase in the number of full-time employees. The employment rate stood at 75.2 percent, 0.2 percentage points higher than in the November-January period, but 1.4 percentage points lower than before the pandemic. At the same time, the unemployment rate went down 0.3 percentage points to 4.7 percent in the three months to April, the lowest since the June-August 2020 period. The reading was in line with economists' expectations. Average weekly earnings in the three months to April climbed by 5.6 percent y-o-y, recording the biggest rise since March 2007. The ONS noted that although there were some signs of employers offering sign-on bonuses to attract staff, most of the increase reflected base effects and other distortions.

Meanwhile, the ONS’s early estimates for May revealed that the number of the payrolled employees increased 197,000 in May to 28.5 million, recording its biggest one-month gain since records began in July 2014. The claimant count dropped 92,600 from the previous month. This represented the biggest decline in jobless claims since November of 1996.

Market participants also shrugged off the British prime minister (PM) Boris Johnson’s announcement that the new reopening target date could be shifted forward if enough progress is made. On Monday, the UK’s government delayed its reopening plans from June 21 to July 19.

"This meeting has started with a breakthrough on aircraft. This really opens a new chapter in our relationship because we move from litigation to cooperation on aircraft - after 17 years of dispute," von der Leyen reportedly said.

FXStreet reports that economists at ING note that the GBP/USD pair is set to advance nicely along with EUR/USD. A delay to the last stage of reopening due to the spread of the Delta variant of COVID-19 would have a limited impact on the UK economy. Additionally, the pound is less vulnerable to a positioning squeeze now.

“With EUR/GBP stuck around the 0.86 level, the GBP/USD price action is all about the direction of EUR/USD. Our view for a gentle rise in EUR/USD should translate into higher GBP/USD.” 

“On the GBP side, the economic reopening and fast vaccination stories are fully priced in. While the spread in the Indian variant makes it likely that the 21 June restriction easing will be postponed, the impact on the economy should be very limited (with the delay likely being a matter of weeks).” 

“GBP speculative longs no longer stand out among G10 peers and should make GBP less vulnerable to the positioning squeeze.”

FXStreet notes that China is shifting towards a green economy and in doing so, is encouraging more domestic steel consumption over steel exports. Analysts at OCBC Bank suggest that subdued prices in the next six months may be expected as a result of active government intervention, but iron ore may test $250/mt when Chinese buyers look to replenish depleted stockpile.

“The key changes that we continue to expect are the encouragement of a) more scrap steel imports; b) higher domestic consumption of steel vis-à-vis export market sales. In short, we expect China to import less iron ore while encouraging a higher recycling rate of steel domestically.”

“Iron ore imports may remain low in the next 6-9 months as steel mills draw down on existing inventories and sell an increasing share of its steel production to local end-users. As iron ore inventories continue to dwindle, however, we expect China to return for iron ore to replenish stockpiles and feed its domestic appetite for steel.”

“We expect iron ore prices to remain supported in the near-term, and eventually test a high of $250 before the end of the year.”

FXStreet reports that FX Strategists at UOB Group suggest that the upside momentum in USD/CNH could re-visit the 6.4400 level in the next weeks.

24-hour view: “The subsequent USD strength exceeded our expectations as it surged to 6.4197 before pulling back to close at 6.4060 (+0.17%). The rapid rally appears to be overdone and USD is unlikely to strengthen further. For today, USD is more likely to consolidate and trade between 6.4000 and 6.4200.”

Next 1-3 weeks: “USD subsequently rose to 6.4197 before pulling back to close at 6.4060. While USD did not close above 6.4105, upward momentum has improved further and USD is expected to trade with an upward bias towards 6.4400. The upward bias is deemed intact as long as USD does not move below 6.3900 (‘strong support’ level was at 6.3830 yesterday).”

FXStreet reports that economists at ING expect the AUD/USD pair to march forward through the rest of the year.

“On 6 July, the RBA may announce it will not roll-over its 3-year yield-curve-control scheme beyond the April 2024 bond. The unwinding of stimulus should however be very gradual, and while the shape of QE may be tweaked, the size of it should not be materially scaled back just yet. External downside risks remain plentiful, from a potential correction in iron ore prices to more Australia-China trade tensions.”

“We think a broadly supportive risk environment can continue to put a floor below AUD/USD: we target 0.81 by year-end.”

CNBC reports that an analyst from risk consultancy Eurasia Group said that an investment pact between the European Union and China is still possible, but both sides may wait until 2023 at the earliest to ratify the deal.

The EU and China agreed on the deal in December after seven years of negotiations. But tensions between the two — which saw both sides imposing sanctions on each other — led the European Parliament to freeze the deal until Beijing lifts sanctions on EU politicians.

Despite the hiccup, Neil Thomas, China analyst at Eurasia Group, said it’s “more probable than not” that the EU and China will in the longer term ratify the deal called the Comprehensive Agreement on Investment.

“That’s because the deal really has lopsided benefits for Europe, and that’s going to keep the deal alive in terms of it enjoying a fair amount of approval and popularity amongst EU officials and majority of the bloc’s members,” Thomas told.

According to the report from Eurostat, the first estimate for euro area exports of goods to the rest of the world in April 2021 was €193.8 billion, an increase of 43.2% compared with April 2020 (€135.3 bn), which had been heavily affected by the COVID-19 containment measures widely introduced by the Member States. Imports from the rest of the world stood at €182.8 bn, a rise of 37.4% compared with April 2020 (€133.0 bn). As a result, the euro area recorded a €10.9 bn surplus in trade in goods with the rest of the world in April 2021, compared with +€2.3 bn in April 2020. Intra-euro area trade rose to €178.9 bn in April 2021, up by 61.9% compared with April 2020.

In January to April 2021, euro area exports of goods to the rest of the world rose to €764.9 bn (an increase of 8.9% compared with January April 2020), and imports rose to €697.2 bn (an increase of 7.9% compared with JanuaryApril 2020). As a result the euro area recorded a surplus of €67.7 bn, compared with +€56.9 bn in January-April 2020. Intra-euro area trade rose to €687.9 bn in January-April 2021, up by 15.6% compared with January-April 2020.

FXStreet reports that strategists at OCBC Bank see a low possibility of oil returning to $100. 

“July 2021 will see the last of OPEC+’s plans to ease its pandemic supply curbs, with production to increase a total of 850kbpd. Despite that increase, the total output level of OPEC+ is still 6mbpd below its Oct’18 baseline.”

“Our base case is for global supply to increase by 2mbpd by end 2022, of which largely from OPEC+ and Iran. Should Iran’s oil embargo be lifted in the next 18 months, we expect 2mbpd of Iranian crude to return to international waters, in which case we expect OPEC+ to keep constant its 6mbpd output cut through 2022.”

“We see Brent peaking at $80 by end 2021, but the flip in the global supply balance from deficit to surplus next year means Brent may begin its retracement next year towards its long-term average price of $65.”

FXStreet reports that strategists at OCBC Bank discuss XAU/USD prospects.

“The shift downward in both nominal yields (as a result of the soft US labour market) and breakeven yields (due to falling inflation expectations) mean real yields are likely to continue trading within range for now. Our rates strategist expects that US real yields may find a bottom at -1.0% in the near term and slowly rise towards -0.6% by end-2021. This suggests that gold, which typically moves in opposite correlation to real yields, may have found a top at its current level of $1900.”

“We expect gold to end at $1800 by end 2021 as the global vaccination drive gathers pace while the Fed turns increasingly less dovish on its monetary stance, driving real rates higher and in turn pushing gold prices down.”

FXStreet reports that economists at Rabobank anticipate that the USD is likely to be on the front foot ahead of the June 16 FOMC meeting.

“For the USD a reduction in inflation could be supportive insofar as it would boost the value of real yields in the US. On the other hand, the strength of US CPI inflation underpins the view that the first tapering announcement from the Fed is inevitably becoming closer. News on this front would also be positive for the USD. While there may be scope for some short-term disappointment for the USD on the event, we would expect this to be short-lived.”

“We see scope for EUR/USD to test 1.20 this summer on anticipation that the tapering discussion at the Fed will soon begin in earnest.”

“As long as further out inflation forecasts remain anchored the market should absorb this well. That said, a revised inflation outlook increasing the risk of an upward shift in the median expectations regarding the Fed fund rate.” 

• As expected, the easing of coronavirus measures has triggered a swift recovery in the domestic economy. 

• The economic situation has also brightened internationally, with a dynamic recovery looking likely. 

• Following the gradual easing in early March, the domestic economy has begun to recover rapidly, as predicted, after suffering significant setbacks in the winter half-year. 

• Industrial production also rose considerably, buoyed by the strong resurgent demand from key trade partners. 

• The indicators are pointing to further increases in both the industrial and the service sector. 

• The Expert Group therefore expects Switzerland’s GDP to grow significantly in the second quarter of this year.

• Provided that the planned easing of measures can be implemented as intended, the economic recovery is likely to become more widespread as time goes on. 

• Overall, the Expert Group expects growth in GDP adjusted for sporting events of 3.6 % in 2021 (March forecast: +3.0 %). 

• The Swiss economy would therefore grow at a significantly above-average rate by historical standards, meaning that GDP would climb well above the pre-crisis level in the second half of 2021. 

• As a result, companies are predicted to increase their investments and expand their workforces. Short-time working is likely to be reduced gradually and unemployment should fall further. 

• The unemployment rate is expected to come to an annual average of 3.1% for 2021 (March forecast: 3.3 %).

• For 2022, the Expert Group is also forecasting an above-average growth in GDP adjusted for sporting events of 3.3 % (unchanged forecast).

During today's Asian trading, the US dollar fell against the euro and was almost unchanged against the yen ahead of the start of the two-day meeting of the US Federal Reserve (Fed).

The ICE index, which tracks the dollar's performance against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona), fell 0.08%.

The meeting of the Federal Reserve will be held on June 15-16. Following the results of the meeting of the management of the Fed, in addition to the traditional statement on the rate and volume of asset repurchases, economic forecasts will be published, as well as expectations regarding the further dynamics of interest rates. Experts believe that the Fed will not give signals about plans to gradually reduce the volume of bond purchases earlier than in August-September of this year.

At the same time, the dot plot, a chart that reflects the individual expectations of the members of the Fed's board of governors and the heads of the Federal Reserve banks regarding interest rates, can show that all 18 Fed managers expect at least one rate increase in 2023, predicts more than half of Bloomberg respondents.

ING analysts believe that the euro may rise to $1.25 by the end of the summer, if the real yield on US government bonds remains significantly below zero, and the macroeconomic data in the euro zone is optimistic.

The pound consolidated against the US dollar. British Prime Minister Boris Johnson yesterday announced the extension of quarantine measures in England for another 4 weeks, pushing the deadline for their removal from June 21 to July 19, in order to reach a larger number of residents with COVID-19 vaccination.

According to the report from INSEE, in May 2021, the Consumer Price Index (CPI) rose by 0.3% over one month, after +0.1% in April. The service prices grew (+0.3% after +0.1%) and those of energy (+0.5% after –0.4%) and those of manufactured goods (+0.1% after –0.1%) rebounded. The prices of tobacco were stable and those of food slowed down slightly (+0.5% after +0.6%).

Seasonally adjusted, consumer prices advanced by 0.2% after +0.1% in April.

Year on year, consumer prices rose by 1.4%, after +1.2% in April. The energy prices accelerated (+11.7% after +8.8%). The decline in manufactured good prices softened (–0.1% after –0.2%). The decrease in food prices was maintained at the same level as in April (–0.3%). The price of services (+1.1% after +1.2%) and those of tobacco (+5.3% after +5.8%) slowed down.

Year on year, core inflation fell in May, down to +0.9%, after +1.0% in April. The Harmonised Index of Consumer Prices (HICP) rose by 0.3% over one month after +0.2% in the previous month; year on year, it increased by 1.8%, after +1.6% in April.

EUR/USD

Resistance levels (open interest**, contracts)

$1.2209 (537)

$1.2186 (407)

$1.2170 (118)

Price at time of writing this review: $1.2133

Support levels (open interest**, contracts):

$1.2081 (2999)

$1.2054 (1587)

$1.2020 (2106)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 14 is 43952 contracts (according to data from July, 9) with the maximum number of contracts with strike price $1,1650 (3886);

GBP/USD

$1.4219 (405)

$1.4197 (307)

$1.4159 (146)

Price at time of writing this review: $1.4113

Support levels (open interest**, contracts):

$1.4043 (315)

$1.4015 (670)

$1.3953 (2981)

Comments:

- Overall open interest on the CALL options with the expiration date July, 9 is 13021 contracts, with the maximum number of contracts with strike price $1,4500 (3528);

- Overall open interest on the PUT options with the expiration date July, 9 is 14564 contracts, with the maximum number of contracts with strike price $1,4000 (2981);

- The ratio of PUT/CALL was 1.12 versus 1.12 from the previous trading day according to data from June, 14

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.

According to the report from the Federal Statistical Office (Destatis), the inflation rate in Germany, measured as the year-on-year change in the consumer price index, stood at +2.5% in May 2021. The inflation rate rose for the fifth month in a row. That level was last recorded in September 2011, that is almost ten years ago. Destatis also reports that consumer prices were up 0.5% compared with April 2021.

The prices of goods (total) increased by 3.1% between May 2020 and May 2021, which was above average. Energy product prices were 10.0% higher than a year earlier, after +7.9% in April 2021. In addition to the current rise in energy prices, the increasing inflation rate was also attributable to temporary special effects, in particular the CO2 charge introduced at the beginning of the year and the low energy product prices recorded a year earlier (base effect). At that time, the prices of mineral oil products were especially low. A year-on-year price increase was therefore recorded especially for heating oil (+35.4%) and motor fuels (+27.5%). However, electricity prices were almost unchanged (-0.1%).

Excluding energy prices, the inflation rate would have been +1.8% in May 2021; excluding the prices of heating oil and motor fuels, it would have been only +1.6%.

Compared with April 2021, the consumer price index rose by 0.5%. The prices of energy products rose by 0.6%, especially heating oil became more expensive (+4.0%). In contrast, the prices of food went down slightly (-0.3%). Consumers had to pay less, in particular, for fresh vegetables (-4.6%) than in the previous month.

The Office for National Statistics said that the latest figures suggest that the jobs market is showing signs of recovery.

February to April 2021 estimates show a quarterly decrease in the unemployment rate, while the employment rate increased and the economic inactivity rate was largely unchanged on the quarter.

The UK employment rate was estimated at 75.2%, 1.4 percentage points lower than before the pandemic (December 2019 to February 2020), but 0.2 percentage points higher than the previous quarter.

The UK unemployment rate was estimated at 4.7%, 0.8 percentage points higher than before the pandemic, but 0.3 percentage points lower than the previous quarter.

The UK economic inactivity rate was estimated at 21.0%, 0.8 percentage points higher than before the pandemic, but largely unchanged on the quarter.

The number of payrolled employees has increased for the sixth consecutive month, up by 197,000 in May 2021 to 28.5 million. It is however 553,000 below levels seen before the coronavirus (COVID-19) pandemic. Since February 2020, the largest falls in payrolled employment have been in the accommodation and food services sector, people aged under 25 years, and people living in London.

The number of job vacancies in March to May 2021 was 758,000, only 27,000 below the level before the coronavirus (COVID-19) pandemic in January to March 2020; most industries have recovered to show vacancies above pre-pandemic levels. The strongest quarterly increase was in accommodation and food services. In May 2021, the experimental monthly vacancies data, and the experimental Adzuna online vacancies data both surpassed pre-pandemic levels.

Annual growth in average employee pay has continued to increase, however this is driven by compositional effects of a fall in the number and proportion of lower-paid employee jobs and because the latest month is now compared with April 2020 when earnings were first affected by the coronavirus (COVID-19) pandemic (the base effect). Growth in average total pay (including bonuses) and regular pay (excluding bonuses) among employees was 5.6% for the three months February to April 2021.