MNI ASIA OPEN - FOMC Meeting In Focus

NEWS

FED (MNI): Fed To Debate More Aggressive Rate Moves
Federal Reserve officials are set to debate even more aggressive interest rate increases at their meeting this week after inflation and inflation expectations data came in worse than expected Friday and Monday. Futures markets all but fully priced in a 75-basis-point rate increase this week after a Wall Street Journal report late Monday suggested the FOMC could surprise markets with such a move, which would be the first rate increase of such a magnitude since a rare 3/4-point hike in 1994. Officials had laid out a plan for 50-basis-point hikes in June and July before reassessing in September, but CPI jumped 1.0% in May from a month earlier, rising 8.6% over a 12-month period, a fresh 40-year high.

AUSTRALIA (MNI): Australia Inflation to Peak Near 7% In Q4: Lowe
Headline Australian inflation will likely peak at just under 7% in the last quarter of this year before gradually falling back to the central bank's target range of 2% to 3%, Reserve Bank of Australia Governor Philip Lowe said Tuesday. Lowe, in a rare public interview with government owned broadcaster ABC, repeated his view that official rates, currently at 0.85%, would reach a high point of 2.5% over time and at a pace which would be "determined by events.

EUROPE (MNI): Europe Has Tools To Tackle Headwinds - EU Official
The Euro Area is well prepared to tackle any economic and market headwinds, a senior EU official said Tuesday. Speaking ahead of Thursday's Eurogroup meeting, the official said rising bond yields would be part of the minister's' discussions. "We have the tools and resources that will keep our economies on track and maintain calm market conditions," the official said.
Finance ministers will discuss the macroeconomic situation in the euro zone on Thursday and hear a presentation from ECB President Christine Lagarde on the bank's latest policy decisions, which have led to some volatility in the financial markets.

ECB (MNI): Schnabel Hints At Anti-Frag Tool, But Details Still Sparse
Speaking today at Panthéon-Sorbonne University on euro area bond market fragmentation, Isabel Schnabel stated that "...monetary policy needs, at times, to respond to market developments that undermine the smooth transmission of monetary policy."
"In December of last year, we made clear that we would not tolerate price adjustments that would undermine the transmission of our monetary policy."
"While the flexible allocation of PEPP reinvestments is one way to address fragmentation, our commitment is stronger than any specific instrument. Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits. And our track record of stepping in when needed backs up this commitment." The full speech can be found here.

EUROPE (MNI): EU Parliament Committees Reject Green Bond Taxonomy
The European Parliament's ECON and ENVI committees today voted against the European Commission's green investment taxonomy following controversy over its inclusion of nuclear and natural gas as transitional fuels. The Parliament will hold a final vote on the taxonomy at its plenary session in Strasbourg next month. Recent committee hearings with private investors revealed dissatisfaction among many of them at the Commission's decision to include nuclear and gas.

EUROPE (MNI): Global Euro Role Stable, Ukraine Impact Unclear - ECB
The international role of the euro remained stable in 2021, with currency indicators suggesting it was used in 19% of global transactions on average, while the euro's share in global foreign exchange reserves increased 0.5% to 20.6%, according to ECB research released Tuesday. The implications of Russia's invasion of Ukraine for global euro use were still uncertain, the report said.

UK (MNI): Posen Sees UK Recession As BOE Tightens Hard
The Bank of England will have to raise interest rates more than expected, likely pushing the UK into recession, as global price pressures are compounded by the inflationary effects of Brexit, former Monetary Policy Committee member Adam Posen told MNI. Brexit has made supply issues related to the Covid pandemic worse, generating impediments to trade just as the UK tackles the wave of global inflation, Posen said.
"My fear and my strong expectation is that Great Britain is going to have to go through a real recession irrespective of what happens in the U.S. and China, that they're going to have to raise rates another 300 basis points-plus from here," he told MNI's FedSpeak podcast.

US (Bloomberg): Biden Ally Floats 21% Surtax on Oil Profits to Blunt Inflation
Oil companies that record a profit margin better than 10% would face a new federal surtax under a plan developed by a key senator, as Democrats and the White House struggle to curb US energy costs and broader inflation. The proposal by Senator Ron Wyden, an Oregon Democrat who chairs the tax-writing Finance Committee, would mean oil companies face federal taxes of as much as 42% on profits considered excessive -- the 21% US corporate tax plus a new 21% surtax, according to two people briefed on the proposal.

EQUITIES (BBG): Hedge Fund Selling Was Never More Furious Than in Last Two Days
The smart money dumped stocks at the fastest pace on record as a vicious selloff sent the S&P 500 into a bear market. Hedge funds tracked by Goldman Sachs Group Inc. offloaded US equities for a seventh straight day Monday, with the dollar amount of selling over the last two sessions exploding to levels not seen since the firm’s prime broker began tracking the data in April 2008. The exodus came as the equity rout worsened amid concerns that the Federal Reserve will need to hasten its inflation-fighting campaign at the risk of causing an economic recession. As stocks careened and Treasury yields spiked, the fast money rushed to double down on bearish wagers.

DATA

MNI: US MAY IBD/TIPP ECON OPTIMISM INDEX 38.1
US MAY IBD/TIPP ECON OPTIMISM INDEX 6-MO FORECAST 30.6

MNI: US REDBOOK: JUN STORE SALES +11.9% V YR AGO MO

US Producer Prices Rise at a Brisk Pace, Adding to Fed Pressure (Bloomberg)
Prices paid to US producers surged in May, underscoring persistent inflationary pressures across the economy that are likely to keep the Federal Reserve aggressively raising interest rates. The producer price index for final demand increased 0.8% from April and 10.8% from a year earlier, Labor Department data showed Tuesday. That followed a 0.4% advance in the prior month. Nearly two thirds of the May increase was due to an advance in goods prices, especially energy.

MNI Fed Preview: June 2022 - UPDATE: Justifying 75

We've published an update of our June FOMC preview (emailed to subscribers and available on our website), including tentative predictions for the updated dot plot / Statement, and updates by sell-side analyst expectations:

• With 90+% probability of a 75bp hike now priced into rate futures, the Fed is likely to deliver just that on Wednesday.
• The Statement will incorporate stronger hawkish language in order to justify the surprise acceleration in the hike pace.
• June’s Dot Plot will become much more hawkish vs March’s and vs what was expected prior to a 75bp hike becoming consensus. But the outlined rate path will probably fall short of current market pricing.

FOREX: GBPUSD Falls Below 1.20 As Greenback Maintains Upward Trajectory

• GBP was the clear outlier on Tuesday, sinking around 1.35% to its lowest level against the US Dollar since March 2020. Weakness was even more pronounced in the cross with EURGBP extending to 13-month highs just below the 0.8700 mark.
• Cable’s move lower this week confirms a resumption of the primary downtrend and the next technical support point resides at 1.1934, the high on Mar 20, 2020. In similar vein, EURGBP has cleared resistance at 0.8619, the May 12 high and an important short-term bull trigger. The immediate focus is on 0.8701, the May 7 2021 high and 0.8721, the Apr 26 high.
• Euro weakness was contained by the appreciation against GBP on Tuesday, however, a brief pop to 1.0485 in EURUSD was well sold into with the pair gravitating back to around the 1.0400 handle as we approach the APAC crossover.
• With US yields at recent highs and equity benchmarks consolidating at the lows, the USD Index (+0.40%) looks set to post a fifth consecutive winning session. US May PPI came in basically in line with expectations, but a touch on the soft side for core readings and downward revisions to April – having very little impact on the greenback.
• Overall, the greenback strength was broad based with not only the likes of AUD, NZD and CAD retreating but also weakness filtering through to CHF and JPY. USDJPY is making fresh 24-year highs above 1.3520 as of writing.
• The Chinese Yuan bucked the trend with USDCNH seen 0.42% lower on Tuesday.
• Wednesday will bring April data for euro area IP and goods trade and the final estimates of French inflation in May. On the US docket, May retail sales and June Empire Manufacturing are notable data points before the June FOMC decision/SEP and subsequent press conference with Chair Powell.
• Central bank decisions from both the SNB and BOE are also due on Thursday.

US TSYS SUMMARY: Sell-Off Continues As Speculation Builds Around 75bp Hike

Following some temporary respite earlier in the day, USTs continued selling-off in the later part of the session as expectations build ahead of tomorrow's FOMC meeting, with markets now largely pricing in a 75bp hike.

• UST yields are now up 8-14bp and are now trading at the highs of the day. the belly of the curve is underperforming while TYU2 is plumbing new lows.
• Real yields have pushed higher with the 5-year reaching the highest level since March 2020.
• The dollar continues to make broad gains with the DXY trading up to 105.53 - the highest level since 2002.
• Headline PPI data was broadly in line with expectations and continue to point towards persistent elevated inflationary pressure.
• Please see our updated Fed Preview linked above.