Futures Rise Into The Fed Day As Dip Buyers Return

US equity futures are modestly higher into Fed Day, bucking the trend of lower Asian and European markets, as the market shrugs off geopolitics after the US did not join Israel in bombing Iran and the dip buyers return. As of 8:15am, S&P futures are up 0.1% and Nasdaq 100 futs rise 0.2% even as global equities trade mostly in the red following the 6th day of strikes between Isreal/Iran. Pre-mkt, Mag7/Semis are outperforming; cyclicals poised for a strong day as Financials get a boost from de-reg after Bloomberg reported that regulators plan to reduce a key capital buffer for big lenders to ease constraints over trading in the Treasuries market. Sweden's Riksbank cut rates by 25bps (expected) while UK CPI was mostly in-line ahead of BoE rate decision tomorrow...FTSE flat/DAX -30bps/CAC -10bps/ Shanghai +4bps/Hang Seng -1.12%/Nikkei +90bps. Overnight, Trump called for Iran’s unconditional surrender/Iran said they will not accept an imposed peace or war and that they will respond “very seriously”/Iran said to be preparing missiles for possible retaliatory strikes on US Bases/worries about the straight of Hormuz where 20% of world seaborne-trade oil supply travels through daily/US announced a meeting on Weds with Pakistan’s army head to discuss mediation. Otherwise, all eyes on FOMC and the dotplot (economists expects them to remain on hold until further clarity about policy/tariff/economic outlook). Treasury yields are lower, the USD weaker, and commodities seeing profit-taking. While the Fed is the focal point of today’s macro data, keep an eye on initial claims and an update to the trend. TIC data at 4pm will show (lagged) foreign ownership of Treasuries. Focus is also on whether the US is planning to get directly involved in the Middle East conflict.

In premarket trading, Mag 7 are mostly higher alongside index futures (Tesla +0.3%, Meta +0.2%, Apple +0.2%, Amazon +0.2%, Nvidia +0.2%, Alphabet +0.2%, Microsoft -0.2%). Alcohol beverage stocks may move after Reuters reports that US Dietary Guidelines are expected to eliminate the long-standing recommendation that adults limit alcohol consumption to one or two drinks per day. Here are the other notable premarket movers: 

• Biomea Fusion (BMEA) falls 8% after the drug developer launched an offering of stock and warrants.
• Bitdeer Technologies (BTDR) drops 6% after the Bitcoin miner said it was offering $300 million in convertible senior notes due 2031 in a private placement.
• Circle Internet Group (CRCL) climbs 3% after the US Senate passed stablecoin legislation setting up regulatory rules for cryptocurrencies pegged to the dollar.
• Marvell Technology (MRVL) gains 2%, with analysts positive on the chipmaker following an event focused on AI, where Marvell raised its overall data center total addressable market to $94 billion by 2028, up from $75 billion.
• Nucor (NUE) rises 2% after the steelmaker forecast earnings per share for the second quarter, guidance that beat the average analyst estimate.

Fed policymakers face heightened uncertainty as geopolitical tension adds to the inflation and labor market risks that are tied to the Trump administration’s trade policies. While tariffs haven’t so far accelerated price increases, consumers are turning anxious and household finances have worsened. Officials are widely expected to hold policy steady on Wednesday for a fourth straight meeting (see full preview here). Traders continue to wager on just shy of two quarter-point interest rate cuts this year, with the first move fully priced in for October. Fed officials penciled in two cuts for 2025 at their March projection.

“This is the meeting where the Fed will have fully incorporated tariffs into their forecasts,” Citigroup Inc. economist Andrew Hollenhorst told Bloomberg TV. “What they’re going to do with the dots is to leave them where they are. If you look at the inflation data that we have in hand, it’s a little bit hard be arguing that they need to get a lot more hawkish.”

Brent crude traded near $76.50 a barrel after rallying around 10% since Israel started its offensive against Iran last week. Markets are awaiting news on whether the US plans to become directly involved in the conflict, raising concerns about supply disruptions.

An overnight meeting between President Donald Trump and his national security team ensured tensions remain high, with speculation rife the US is close to joining Israel’s attacks. Iran’s Supreme Leader Ayatollah Ali Khamenei said that his country won’t surrender. 

“Thus far we’ve seen the conflict in the Middle East having a relatively contained impact on markets,” Ursula Marchioni, BlackRock Inc.’s EMEA head of investments and portfolio solutions, told Bloomberg TV. If we were to see an escalation, “that is where you’ll start to see a transmission mechanism unlocking toward further inflationary pressure and potential impact on growth

Not helping sentiment was news that the European Union is refusing to hold an economic meeting with China due to a lack of progress on trade disputes. And speaking of Europe, the Stoxx 600 trades down -0.3% but off session lows, with health care and automobile shares leading declines, while utilities and real estate stocks are the biggest outperformers. Here are the biggest movers Wednesday:

• Airbus shares rise as much as 3.9% after the planemaker said it was extending the upper range of its dividend payout ratio to 30-50% from the current level of 30-40%
• Gerresheimer shares gain as much as 7.7%, best performer in the Stoxx 600 Health Care Index on Wednesday morning, after the drug-packaging maker said KPS Capital Partners is still in discussions with Warburg Pincus
• Rathbones rises as much as 8.1%, the most in more than three years, after BofA initiates coverage of the UK wealth manager with a recommendation of buy, citing the integration of IW&I as well as flow trends.
• Howden Joinery Group falls as much as 3.5% after analysts at Citi said they have a negative short-term view on the kitchen manufacturer as soft demand could weigh on investor sentiment, while CFRA added the stock to its “Biggest Concerns List”
• Grenergy Renovables slides as much as 10% after investors offered shares at a discount to Tuesday’s closing price
• Deutsche Pfandbriefbank shares plunge as much as 13%, hitting their lowest level in over two months, after the specialist bank for commercial real estate pulled its guidance for this year, warning it is discontinuing its US business and could report an annual loss
• Tullow Oil shares plummet as much as 22%, the most since 2020, after Sky News reported that talks about a merger with Meren Energy have collapsed. Analysts at Shore Capital believe Tullow’s ongoing debt refinancing plans may have proved an obstacle to talks progressing.

Earlier in the session, Asian stocks struggled for direction as traders monitored the latest developments in the Middle East and awaited the Federal Reserve’s monetary-policy decision. The MSCI Asia Pacific Index was steady, with gains in Japanese and South Korean shares offset by losses in Hong Kong and India. Tencent and Alibaba were among the biggest drags on the benchmark, while Nintendo and TSMC advanced. Also hurting on sentiment was news that the European Union is refusing to hold an economic meeting with China due to a lack of progress on trade disputes. That’s adding to geopolitical worries and “raises fears of deeper decoupling beyond the US-China relationship, weighing on sentiment in Hong Kong given its close ties to mainland markets and sensitivity to global investor flows,” said Charu Chanana, a strategist at Saxo Capital Markets. Meanwhile, a closely-watched forum in Shanghai featuring China’s financial chiefs has so far yielded little positive surprise for investors.

In FX, the Bloomberg’s Dollar Spot Index dipped 0.1%; the Fed is expected to keep rates steady but traders have amassed a record futures bet that there will be a more dovish tilt right after Powell’s term ends in May 2026. GBP/USD rose as much as 0.4% to 1.3476; UK inflation remained at its highest level in over a year. USD/SEK rose as much as 0.3% to 9.5795, with Sweden’s krona leading G-10 losses against the dollar; The Riskbank cut its key rate and signaled potential for more easing.

In rates, treasury yields are slightly lower as US trading gets under way, supported by bigger gains for gilts following UK May inflation data. US session includes weekly jobless claims report, a day earlier than normal because of US holiday Thursday. US yields are 1bp-2bp lower on the day with curve spreads little changed. 10-year is near 4.375% with UK counterpart outperforming by 2bp and gilts leading gains for most European bond markets. Fed rate decision at 2pm New York time and Chair Powell news conference 30 minutes later. Ahead of Fed rate decision, swaps market prices in 44bp of easing by year-end; no move is expected today, however revised dot plot has potential to show a median forecast of just one cut this year, vs two in March projections (see full preview here).

In commodities, oil has been choppy and is now down. WTI drops 1.1% to around $74/barrel. Gold fluctuates as well, and is now down some $3 to $3,385/oz.

In crypto, bitcoin is on a weaker footing and slips below USD 105k; Ethereum also lower to a similar degree but manages to hold above USD 2.5k. US Senate had enough votes for stablecoin bill passage, according to Bloomberg.

The US economic data slate includes May housing starts/building permits and weekly jobless claims (8:30am) and April TIC flows (4pm).

Market Snapshot

• S&P 500 mini +0.1%
• Nasdaq 100 mini +0.2%,
• Russell 2000 mini +0.1%
• Stoxx Europe 600 little changed
• DAX little -0.3%
• CAC 40 -0.1%
• 10-year Treasury yield 4.37%. 2bps
• VIX -1 points at 20.63
• Bloomberg Dollar Index -0.1% at 1207.62
• euro +0.2% at $1.1508
• WTI crude -1.3% at $73.9/barrel

Top Overnight News

• Israel is running low on defensive Arrow interceptors, according to a U.S. official, raising concern about the country’s ability to counter long-range ballistic missiles from Iran if the conflict isn’t resolved soon. Tehran allegedly has plans to strike US bases in the region if the Pentagon joins Israel in striking Iran.  WSJ, NYT
• Fed Preview: Since the last FOMC meeting, trade tensions have diminished somewhat, inflation has been low, and the hard data have shown only limited signs of softening. At its June meeting, the FOMC will likely reiterate that it plans to remain on hold until it has further clarity and downplay its longer-term projections as highly contingent on a still very uncertain economic and policy outlook.
• US bank regulators plan to reduce a key capital buffer for big lenders to ease constraints over trading in the Treasuries market, people familiar said. The proposal aims to cut the holding company’s capital requirement by up to 1.5 percentage points. BBG
• Trump posted "U.S. Wage Growth BEST IN 60 YEARS!", via Truth Social
• China’s central bank governor has said he expects a new global currency order to emerge after decades of dominance by the US dollar, with the renminbi competing in a “multi-polar international monetary system.”  FT
• Chinese auto sales at risk of slowing as some cities pause sector stimulus after running out of funds. RTRS
• Japan will prioritize protecting its national interests in trade talks without rushing into a deal with the US, Japanese PM Ishiba said as he wrapped up two days of meeting at the G7 gathering. BBG
• The G7 meeting wraps up with no trade deals announced while the reciprocal tariff deadline fast approaches (July 9), leaving some to speculate if what the US asked from other countries is too high of a price for them to pay. WSJ
• British inflation cooled in May as expected by the Bank of England, which is set to keep interest rates on hold this week while it assesses international energy markets rocked by escalating conflict in the Middle East. Core was inline (+3.5%, down from +3.8% in Apr). RTRS
• Sweden’s Riksbank cut its main policy rate by 25bp to 2%, as expected, as the economic recovery loses momentum and inflation cools (the Riksbank said there was “some probability of another cut this year”). Riksbank

Tariffs/Trade

• Mexican President Sheinbaum said she had a very good phone conversation with US President Trump; they agreed to work together to reach an agreement on diverse topics that worry them, according to Reuters.
• White House said US President Trump will sign an additional executive order this week to keep TikTok running; the extension will last 90 days.
• South Korea and the US are to hold the third round of trade talks next week, according to Maeil.
• Japanese PM Ishiba agreed with US President Trump to continue ministerial-level tariff talks; Ishiba said Japan will continue to work intensely to achieve a trade deal with the US.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly lower following the softer handover from Wall Street, with stocks in the US spooked by what seemed like an imminent US involvement in Israel's offensive against Iran. However, sentiment in APAC hours recovered as news surrounding US involvement quietened down overnight, with oil also coming off its best levels amid no signs of an American military attack. Ranges remained narrow ahead of the FOMC announcement. ASX 200 traded subdued with sectors overall mixed, but gold miners provided headwinds for the index. Nikkei 225 was modestly firmer and underpinned by recent losses in the JPY, while Japanese PM Ishiba agreed with US President Trump to continue ministerial-level tariff talks. Ishiba added that Japan would continue to work intensely to achieve a trade deal with the US. Hang Seng and Shanghai Comp traded lower but to varying degrees with underperformance in Hong Kong, although with limited news from the region, and attention focused on geopolitics.

Top Asian News

• PBoC governor said they will improve the monetary policy toolbox, according to Reuters.
• Chinese FX regulator said exports have maintained resilience; recent buying of onshore stocks has increased; will continue to implement proactive macro policy; will keep yuan basically stable at reasonable and balanced levels, according to Reuters.
• PBoC injected CNY 156.3bln via 7-day reverse repos with the rate maintained at 1.40%
• China will issue the rest of consumer goods trade-in funds in an orderly manner; is guiding local governments to use the funds in a stable pace. Has allocated CNY 162bln out of CNY 300bln in special treasury funds under the trade-in scheme to local governments.

European bourses (STOXX 600 U/C) opened mixed on either side of the unchanged mark, before grinding ever so slightly higher as the morning progressed. More recently, however, indices have waned off best levels to now show a mixed picture in Europe. European sectors are mixed, in-fitting with the indecisive risk tone seen so far. Utilities takes the top spot, followed closely by Real Estate and then Insurance to complete the top three, whilst Healthcare lags.

Top European News

• ECB's Panetta says the ECB will continue to take decisions on a meeting-by-meeting basis, without pre-committing to defined monetary policy course Macro risk arise from conflicting signals in US trade policy and recent escalation of Israel-Iran conflict. Macro outlook remains subject to substantial and difficult-qualify risks.
• ECB's Villeroy says Trade wars are unfortunate, they are nonsense because they add divisions, via Econostream.

FX

• DXY has given back some of Tuesday's geopolitically-induced gains, given the lack of updates out of the region this morning. More focus on the FOMC announcement later with officials set to stand pat on policy given the highly uncertain economic outlook. There is a chance that the 2025 FFR dot may be tweaked to show just 25bps of loosening this year vs. the prior forecast of 50bps (it would only take two forecasters adjusting their call to shift the median view). DXY has delved as low as 98.50, comfortably above Tuesday's trough at 98.02.
• Incremental macro drivers for the Eurozone remain on the light side. Tuesday's better-than-expected outturn for German ZEW - adding to the recent run of encouraging Eurozone data - failed to have a durable impact on the EUR, with the pair dictated more by price action in the broader USD. Docket today has included a few ECB speakers (reiterated the Bank's meeting-by-meeting approach) and EZ HICP Finals (unrevised). EUR/USD briefly matched Tuesday's low at 1.1474 but has since reclaimed its footing on a 1.15 handle.
• JPY is firmer vs. the USD but to a lesser degree than peers on account of the recent upside in energy prices (Japan is a notable net importer of crude) and a lack of progress on the trade front. These effects appear to have limited JPY's role as a safe-haven on Tuesday. USD/JPY briefly eclipsed yesterday's high at 145.38, topping out at 145.44 before returning to levels closer to 145.
• GBP firmer vs. the broadly weaker USD and flat vs. the EUR. Little sustained follow-through has been seen following the latest UK inflation metrics which matched Refinitiv expectations but was a touch above Bloomberg's; the Services figures came in shy of expectations. The release saw incremental upside in the GBP but ultimately failed to sustain. GBP/USD is currently towards the bottom end of Tuesday's 1.3415-1.3592 range.
• Antipodeans are both attempting to claw back some of Tuesday's risk-induced losses as high-beta FX tracks the recovery in sentiment after geopolitical updates quietened down overnight and the US has (for now) refrained from joining Israel's attack on Iran. From a macro perspective, focus this week will be on NZ Q1 GDP metrics on Wednesday and Australian labour market data on Thursday.
• SEK is net weaker vs. the EUR following the Riksbank's decision to cut rates by 25bps and provide a rate path forecast which "entails some probability of another rate cut in 2025".
• PBoC set USD/CNY mid-point at 7.1761 vs exp. 7.2027 (prev. 7.1746)
• Chilean Central Bank maintains benchmark interest rate at 5.00%, as expected, with the decision unanimous.

Fixed Income

• USTs were exhibiting a modest bearish bias throughout the morning, given the improvement in the risk tone seen as the US is yet to get directly involved in the Iran-Israel conflict. However, this has been limited in nature with USTs only lower by at most 4+ ticks, and now has now edged just above the unchanged mark as broader peers rise. The upside seemingly stemming from a bit of a haven bid, amid reports that the Iranian Supreme leader is to speak shortly, via ISNA. The docket today is headlined by the FOMC, but before that May’s Building Permits/Housing Starts and Weekly Claims are due; latter expected at 245k (prev. 248k).
• Bunds spent most of the morning in the red, but have flicked into positive territory in recent trade. German paper was moving higher into a 2054 & 2046 Bund auction, and then took another leg higher given its strong demand. Holding towards the upper-end of a 130.58-92 band. The low for the session printed alongside the UK CPI release (see Gilts), though the move in Bunds proved short lived and the benchmark quickly climbed back towards unchanged levels. Overall, the benchmark is in a holding pattern into the FOMC (see USTs) and updates on the geopolitical and/or trade fronts.
• Gilts opened lower by a handful of ticks and then slipped to a 92.48 low with downside of 20 ticks on the session. A bearish open that was driven by the lead from fixed peers, as the risk tone continues to recover, and following the digestion of UK data. In brief, CPI came in broadly unchanged from the prior in May, given the offsetting influences of air fares, fuel costs and food prices. Pertinently for the BoE, the services metrics were cooler than forecast and markedly so M/M. After the initial move lower, Gilts are now higher by 11 ticks, in-fitting with peers.
• Germany sells EUR 1.408bln vs exp. EUR 1.5bln 2.50% 2054 and sells EUR 0.988bln vs. exp. EUR 1.0bln 2.50% 2046 Bund

Commodities

• Crude futures are in the red, after a tentative overnight session awaiting further colour on US involvement in the Israel-Iran conflict. On energy commentary from within the region; Israeli Energy Minister Cohen said Israel's energy sector is operating normally; Iranian Oil Minister said fuel supplies are currently stable, there are currently no issues - no move on these comments. Thereafter, Kazakhstan's Energy Minister says it is not considering exiting OPEC+ agreement, which sparked some very modest pressure in oil prices. Brent Aug'25 currently trades towards the bottom end of a USD 75.32-77.00/bbl band.
• Spot gold is attempting to return to the green, after an overnight session spent mostly in negative territory. Overnight, the haven attempted to move beyond the USD 3,400 mark, where it stalled at USD 3399.99/oz, though it now trades at USD 3,384/oz.
• Copper futures are modestly in the green, helped by a softer dollar ahead of the FOMC meeting. The red metal has waned in recent trade, and fell from session highs of USD 9,735/t, moving in tandem the USD attempting to pare some losses.
• Kazakhstan's Energy Minister says it is not considering exiting OPEC+ agreement.
• Russian Deputy PM Novak says there is no shortage of oil due to Middle East conflict, no risk of Russian oil exports declining due to the conflict.
• Israeli Energy Minister Cohen says Israel's energy sector is operating normally; perhaps gas exports will resume in coming hours or days.
• Iranian Oil Minister says fuel supplies are currently stable, there are currently no issues.
• Private inventory data (bbls): Crude -10.133mln (exp. -0.6mln), Distillate +0.32mln (exp. -0.1mln), Gasoline -0.2mln (exp. +0.2mln), Cushing -0.8mln.
• Brent crude's premium to Dubai at its highest since September 2023, according to sources and data cited by Reuters.
• Qatar set June-loading Al-Shaheen crude term premium at USD 2.48/bbl, highest in a year, according to Reuters sources.

Geopolitics: Latest

• Iranian Supreme leader to speak shortly, according to ISNA.
• Iranian ambassador to the UN, says, if we come to the conclusion that the US is directly involved in attacks on Iran, we will start responding to the US

Geopolitics: Involvement

• US officials signaled that the next 24 to 48 hours would be critical in determining whether a diplomatic solution with Iran is possible - or if the president might resort to military action instead, according to ABC.
• "Western sources: We have indications that the US will attack Iran soon", according to Kann News.
• US embassy in Jerusalem will be closed Wednesday through Friday, according to the US State Department.
• US President Trump is considering a range of options when it comes to Iran, including a possible US strike on the country, according to multiple officials cited by NBC.
• Israel Channel 12 journalists report US could join the war against Iran Tuesday night, via Faytuks News citing a telegram post.

Geopolitics: Strikes Headlines

• Iranian Revolutionary Guards said Iran's Fattah missiles broke through Israeli defences, giving it 'complete domination' over Israeli airspace.
• "Israel's Channel 12: Army attacks Tehran's refineries", according to Al Arabiya.
• Israeli military said it attacked a centrifuge production site and several weapons production sites of the Iranian regime last night.
• IDF Spokesman said the Iranian regime still has great capabilities that allow it to harm them, Al Jazeera reports. They attacked the IRGC headquarters and killed Iran's Chief of Staff. "When we finish our mission, we will announce it and will not allow the existential threat against us to continue".
• Iran has reportedly prepared for strikes on US bases if the US joins the war, according to NYT; Officials suggest that in the event of an attack, Iran could begin to plant mines in the Strait of Hormuz.
• Iranian Supreme Leader Khamenei said The battle has begun, via Al Hadath.
• Iranian state media claimed that tonight (Tuesday night) will "hold a surprise the world will remember for centuries", according to multiple reports.
• "IRGC: Attacks on Israel will continue continuously and gradually", according to Sky News Arabia.

Geopolitics: Diplomacy Headlines

• "Source familiar says there are no plans for a meeting this week between Witkoff and Araghchi", according to an Al-Monitor journalist.

US Event Calendar

• 7:00 am: Jun 13 MBA Mortgage Applications, prior 12.5%
• 8:30 am: May Housing Starts, est. 1350k, prior 1361k
• 8:30 am: May P Building Permits, est. 1422k, prior 1422k
• 8:30 am: Jun 14 Initial Jobless Claims, est. 245k, prior 248k
• 8:30 am: Jun 7 Continuing Claims, est. 1940.5k, prior 1956k
• 2:00 pm: Jun 18 FOMC Rate Decision (Upper Bound), est. 4.5%, prior 4.5%
• 2:00 pm: Jun 18 FOMC Rate Decision (Lower Bound), est. 4.25%, prior 4.25%
• 4:00 pm: Apr Net Long-term TIC Flows, prior 161.8b
• 4:00 pm: Apr Total Net TIC Flows, prior 254.3b

Central Banks:

• 2:00 pm: FOMC Rate Decision 

DB's Jim Reid concludes the overnight wrap

A risk-off tone has returned to markets with renewed fears around a further escalation in the Middle East, particularly amid increasing questions over whether the US might join Israel’s strikes against Iran. Those fears saw oil prices post further gains yesterday, with Brent Crude (+4.40%) closing at its highest since February, at $76.45/bbl even if it did hit an intra-day high of $78.50 on Friday. It is little changed this morning. Oil is still below its 2024 average of $80 so we have to put things in perspective from an inflationary angle but it was trading at $58.20 in early May so this fillip to growth and inflation has faded somewhat.

For risk, matters also weren’t helped by a soft batch of US data yesterday, which showed retail sales and industrial production both falling in May. So overall, the newsflow of the last 24 hours has leant in a more stagflationary direction, which meant both the S&P 500 (-0.84%) and Europe’s STOXX 600 (-0.85%) saw fresh declines yesterday. Meanwhile, increased geopolitical risks and higher oil saw the dollar index (+0.84%) post its best day in over a month.

In terms of events in the Middle East, concerns over escalation grew after a series of hawkish Trump posts towards Iran, in which he demanded “UNCONDITIONAL SURRENDER”, and said that “We now have complete and total control of the skies over Iran” and suggested that Iran’s leader Ayatollah Khamenei could be targeted: “We know exactly where the so-called “Supreme Leader” is hiding. He is an easy target, but is safe there - We are not going to take him out (kill!), at least not for now”. Those posts came ahead of the US president’s gathering with his national security team to discuss the Middle East conflict. Trump reportedly spoke to Israel’s Prime Minister Netanyahu after this meeting.

Ahead of that security meeting, Axios reported that Netanyahu believes Trump will attack Iran's underground enrichment facility at Fordow in the coming days, with CBS also reporting that Trump was considering joining the strikes against Iran’s nuclear facilities. US capabilities are seen as potentially key to targeting the site. However, direct US involvement would risk Iranian retaliation again US facilities in the region, with the New York Times reporting that Iran was preparing for such action in the event of US strikes. This renewed escalation in rhetoric has left uncertainty hanging over markets and, at the same time, we’ve seen continued airstrikes between Israel and Iran, with Khamenei’s social media channel posting overnight that “the battle begins”.

The other negative driver yesterday came from US data that was underwhelming across the board. Notably, retail sales fell -0.9% in May (vs. -0.6% expected), which was a second consecutive monthly decline. And 45 minutes later, we also found out that industrial production fell -0.2% in May (vs. unch. expected), so there was little respite there either. Admittedly, some of the core measures fared better, and the retail control group was up +0.4% (vs. +0.3% expected). But the releases still meant the Atlanta Fed’s GDPNow estimate for Q2 fell back a bit, down three-tenths to an annualised rate of 3.5%. Meanwhile, we also found out the NAHB’s latest housing market index had fallen to a two-and-a-half year low in June, at 32 (vs. 36 expected). 

All that meant it was a rough day for risk assets, and the S&P 500 fell -0.84%. Apart from energy, all the major sector groups lost ground, including the Magnificent 7 (-1.06%). Several indicators pointed to more concern in markets, including the VIX index (+2.49pts), which jumped up to 21.60pts, whilst US HY spreads (+7bps) picked up from their 3-month low on Monday. And earlier in Europe, it hadn’t been much better, with major indices including the STOXX 600 (-0.85%), the DAX (-1.12%) and the CAC 40 (-0.76%) falling back.

Whilst the Middle East is the main focus for markets right now, today will also see the Fed announce their latest policy decision. A lot has happened since their last meeting in early May, including the dialling back of China tariffs, the Moody’s downgrade of the US credit rating, as well as the significant escalation in the Middle East. So given that uncertainty and the potential for fresh inflationary spikes, they’re widely expected to keep rates on hold again, and it means the focus will be on the dot plot for where they expect rates to go next. Our US economists think it’ll only signal one rate cut this year, which would be a hawkish shift from March, when they still signalled two cuts. However, they think it’s a close call, and they expect the Fed to mostly maintain existing signals about policy. For more info, see their full preview here.

Ahead of the Fed’s decision, US Treasuries rallied yesterday, on flight to quality, and as the weak data cemented the view that rate cuts were still likely in the months ahead. That meant yields fell across the curve, with the 2yr yield (-1.5bps) down to 3.95%, whilst the 10yr yield (-5.7bps) fell to 4.39%. The outperformance of long-end bonds came after news that the Fed will be holding a meeting on June 25 to discuss changes to the supplementary leverage ratio, which may allow banks to hold more Treasuries. At the short-end, the rally was limited by the rise in inflation expectations, with the 1yr US inflation swap up +7.8bps to 3.16%. We were at near 3 month lows below 3% as recently as of last Thursday, just before Israel’s strikes against Iran.

For Europe however, it was a different story, as inflation fears from higher energy prices dominated, pushing yields higher across the continent. In addition, there was more upbeat data from Germany, as the expectations component of the ZEW survey bounced up to 47.5 in June (vs. 35.0 expected). So yields on 10yr bunds (+0.8bps), OATs (+1.5bps) and BTPs (+3.3bps) all moved higher.

Asian equity markets are mixed this morning, with the Hang Seng index leading the losses in the region, declining by -1.17%. The Shanghai Composite (-0.20%) is also lower along with the ASX (-0.11%). However, the Nikkei (+0.69%) is defying the regional trend, advancing to a four-month high, supported by a weaker yen, while the KOSPI (+0.32%) is also making gains. US equity futures are flat and 10-year USTs have increased by +1.4bps, now standing just above 4.40% as we go to print.

Early morning data revealed that Japan's exports in May fell by -1.7% year-on-year, marking the most significant decline since September 2024, as the nation continues to face trade uncertainties. This decline was less severe than the -3.7% drop anticipated by Bloomberg but represents a reversal from the +2.0% increase recorded in April. Japan's trade deficit swelled to -637.6 billion yen in May, which is smaller than the expected -896.5 billion yen, compared to a revised deficit of -115.6 billion yen the previous month.

To the day ahead now, and the main highlight will be the Federal Reserve’s latest policy decision, along with Chair Powell’s subsequent press conference. Data releases include US housing starts and building permits for May, the weekly initial jobless claims, and the UK CPI print for May. ECB speakers include Elderson, Escriva, Villeroy, Knot, Panetta, Nagel, Centeno and Lane.