S&P futures hit a record high on Monday in a muted session which saw several Asian countries on holiday (China, Hong Kong and Taiwan are enjoying an extended weekend for the Dragon Boat Festival) as focus shifted to the Federal Reserve’s meeting this week, where the central bank is expected to maintain its accommodative stance on monetary policy although there is some debate whether the Fed will hint at tapering and/or hike its administered rates (IOER/RRP). At 730 a.m. ET, Dow e-minis were down 14 points, or 0.04%, S&P 500 e-minis were up 3 points, or 0.07%, to 4,239 and Nasdaq 100 e-minis were up 45 points, or 0.33%. 10Y yield rose as the rally in bonds lost steam while the dollar was flat, and the VIX traded below 16. Bitcoin traded near $40,000 after Musk tweeted over the weekend that Tesla had not sold more of the crypto.

In premarket moves, oil giants Chevron, Exxon, Marathon, Schlumberger, Occidental and Marathon Petroleum rose between 0.2% and 1.3% as crude prices hit their highest levels in more than two years. United Airlines Holdings and American Airlines Group rose 0.7% each after Citigroup raised its price target on the stocks. Some other notable premarket movers:

• Retail favorite AMC Entertainment climbed in U.S. premarket trading, extending Friday’s 15% rally. Other meme stocks are also gaining. AMC traded at $50.70 in premarket trading, up 2.6% from Friday’s close of $49.40. The stock rose 3.1% last week after almost quadrupling over the previous two weeks, with the money- losing movie theater chain having become the new favorite of meme-stock investors
• GameStop rises 1.7%, extending Friday’s 5.9% advance.
• Among other meme stocks climbing on Monday, Clean Energy Fuels adds 4.4%, Jaguar Health +3.7%, Naked Brand +3.1%, Workhorse +2.3%

Recent data has indicated that the U.S. economy is regaining momentum but not overheating, taming worries about inflation and sending the S&P 500 to an all-time high.  While the Fed has reassured that any spike in inflation would be transitory, policymakers could begin discussing the tapering of bond buying at the Tuesday-Wednesday meeting. As a result investors will be closely looking for any signals from the Fed about a timetable for scaling back emergency monetary stimulus. Most analysts, however, don’t expect a decision before the central bank’s annual Jackson Hole, Wyoming, conference in August. To be sure, any shift in the Fed’s dovish rhetoric could upend equity markets. The benchmark has climbed 13% this year while the Dow and the Nasdaq have risen 12.6% and 9.2%, respectively.

“The overarching theme should be of an environment for investors to put cash to work,” Mizuho’s head of multi-asset strategy Peter Chatwell and colleagues wrote in a note to clients. “With this backdrop most asset classes should be able to at least hold ground, if not rally. We doubt any major change in Fed rhetoric will materialize before” the Jackson Hole symposium in August.

Ahead of the Fed, market euphoria was not confined just the US futures and spilled over across global markets, even though a sharp earlier advance in European equities led by shares in energy firms, faded as the session extended. The Stoxx Europe 600 Energy index rose 1.6% gaining the most among sectoral gauges in the region and tracking stronger oil prices. Renewable shares also climb after pledges made by G-7 leaders over the weekend. Oil hit a 32-month high as the rollout of coronavirus vaccines boosted demand expectations, while confidence faded over a quick return of Iranian crude supply. Here are some of the biggest European movers today:

• TeamViewer shares jump as much as 6.7% after the company announced a new partnership with SAP.
• Serco rises as much as 5.5% after the company raises its 2021 underlying profit guidance. Liberum (buy) says the outsourcing firm has continued its strong start to the year, especially in the U.K.
• Ubisoft gains as much as 1.4% after the E3 video-game trade show kicked off at the weekend. The company gave a first look at new games, with Jefferies saying that sentiment toward both the known and new content reads positively.
• Philips drops as much as 8.4% before paring losses after the company recalled ventilation devices used to treat sleep apnea and increased its cost estimate for addressing a defect that may potentially cause cancer.
• Ferrari falls as much as 2.9% after Goldman Sachs downgraded to sell from buy due to an expected increase in capital expenditure and limited positive earnings revisions after an Ebit target was deferred.

Earlier in the session, Asian stocks were little changed as a number of the region’s markets were shut for a holiday. The MSCI Asia Pacific Index swung between a 0.2% gain and 0.1% loss after capping its first weekly decline in a month on Friday. Healthcare stocks provided the biggest support to the regional benchmark, while financials were a drag. Markets were closed in China, Hong Kong, Taiwan and Australia. “For this week, some cautious sentiments may linger ahead of the FOMC meeting as investors weigh the prospects on when the Fed may begin tapering discussions,” Yeap Jun Rong, a market strategist at IG Asia Pte., wrote in a note. The S&P 500 climbed to a new record and capped its third week of gains on Friday amid growing optimism that surging inflation won’t last long. Fed officials this week could project an interest-rate liftoff in 2023, but they won’t signal scaling back bond purchases until August or September, according to economists surveyed by Bloomberg. “The rotation from growth to value seems to be taking a pause over the past few weeks, as easing concerns on persistent inflation have garnered some interest back in growth,” Yeap wrote. Stocks rose in Japan while those in Indonesia and Thailand both dropped

In rates, The Treasury 10-year yield rose to 1.46% after hitting three-month lows on Thursday amid the biggest weekly slide since December. French and German government bond peers also reversed course with yields turning higher. Yields are cheaper by less than 1bp from across the curve; bunds, gilts outperform slightly while Italian bonds lag following large block seller in futures. Treasuries were slightly cheaper across the curve amid bearish trade recommendations by sell-side strategists following last week’s sharp bull-flattening rally. Focal points for U.S. trading this week include 20-year bond reopening Tuesday and Wednesday’s FOMC decision.

The dollar was steady in the wake of a Group-of-Seven leadership meeting that emphasized unity

In commodities, oil extended a run of three weekly gains, hitting a 32-month high with optimism building that economic reopenings will help propel summer demand in both the U.S. and Europe.Hedge funds boosted net-bullish positions to a nearly three-year high, according to the latest Commodity Futures Trading Commission data.

Bitcoin got a fresh jolt over the weekend after Elon Musk said Tesla would allow transactions with the cryptocurrency once mining is done with more clean energy. Bitcoin was trading near a two-week high by Monday morning.

On today’s calendar, there is little of note on the economic calendar. The NATO summit takes place in Brussels today ahead of tomorrow’s meeting between Biden and Putin.

Market Snapshot

• S&P 500 futures up 0.1% to 4249.75
• STOXX Europe 600 up 0.26% to 458.68
• German 10Y yield rose 0.5bps to -0.268%
• Euro little changed at $1.2114
• Brent Futures up 1.18% to $73.55/bbl
• Gold spot down 1.07% to $1,857.38
• U.S. Dollar Index little changed at 90.51

Top Overnight news from Bloomberg

• Group of Seven leaders debated how strongly to respond to China’s effort to win influence around the world and rebuke it over alleged forced labor practices — with U.S. President Joe Biden taking a more hawkish stance and some other leaders wary of the risk the group is seen as an outright anti-China bloc
• The surge in the Covid-19 delta variant first identified in India has forced Boris Johnson and his team to rethink their blueprint for ending social distancing rules on June 21. Now, officials expect the premier to announce a delay of as long as four weeks to the easing of most rules when he sets out his decision to the nation on Monday evening.
• Benjamin Netanyahu, famous for his ability to maneuver out of the tightest political binds, was unseated Sunday after 12 straight years in power by a brittle governing alliance whose ability to end years of political chaos will be challenged by stark internal divisions
• Oil hit a 32-month high as the roll-out of coronavirus vaccines underpins an improved demand outlook in the U.S. and Europe
• President Joe Biden said Russian President Vladimir Putin is correct that relations between their countries are at a nadir, suggesting that will be one of the few points of agreement when they meet Wednesday for their first summit.

Quick look at global markets courtesy of Newsquawk

Asian equity markets began the week quiet amid holiday-thinned conditions with the absence of key markets in the region as Australia was closed in observance of the Queen’s Birthday and with mainland China, Hong Kong and Taiwan on an extended weekend for the Dragon Boat Festival. In addition, participants got to digest last week’s G7 meeting where leaders called out China on human rights and agreed to a new global infrastructure initiative dubbed the Build Back Better World to rival China’s Belt & Road initiative. Furthermore, this week’s busy slate of central bank updates, including the FOMC and BoJ further contributed to the tentative mood. US equity futures traded with incremental gains overnight, and the NQ reclaimed a 14k handle. Nikkei 225 (+0.7%) moved above the 29k level after it coat-tailed on the recent upside in USD/JPY, which has resulted in outperformance among Japan’s exporters and with firm gains also in Toshiba after it ousted four executives in the fallout from the recent probe findings regarding collusion with government officials against foreign investors. The KOSPI (+0.1%) was flat with the largest automakers lackluster despite a near 58% jump in South Korea’s auto exports last month led by Hyundai Motor and Kia Motors, with their shipments higher by 73.8% and 70.8%, respectively. However, Hyundai also announced to temporarily suspend output in its US plant for three weeks due to chip shortages and maintenance. Conversely, Celltrion shares outperformed after its Phase 3 trial showed its antibody COVID-19 treatment Rekirona was safe and effective whereby it slowed severe symptoms of COVID-19 in more than 70% of patients. India’s NIFTY Index (U/C) underperformed somewhat on a pullback from record highs and with heavy pressure on Adani Group companies after the National Securities Depository froze three foreign accounts that have exposure to the group, which could be due to disclosure issues. Finally, 10yr JGBs traded sideways on both sides of the 152.00 level after it plateaued late last week, with demand hampered as Japanese stocks remained afloat due to the lack of BoJ bond purchases in the market with the central bank only seeking Treasury Discount Bills and Commercial Paper.

Top Asian News

• Carlos Ghosn Escape Accomplices Plead Guilty in Tokyo Court
• India’s RBI Tolerating Faster Inflation Amid Growth Focus
• Thailand Misses Vaccine Target as Shortage Hits Mass Rollout

European cash and futures kick the risk-packed week off on a modestly firmer footing (Euro Stoxx 50 +0.4%) but have since waned off best levels after the DAX hit an all-time high (ATH) and the FTSE 100 hit levels last seen in February 2020. Nonetheless, the cash open contrasts the directionless European session experienced all last week. That being said, US equity futures see marginally less pronounced gains and trade closer to the flat-mark – but the NQ reclaimed 14k+ status overnight and tested its April peak/ATH around 14,060. From a central bank perspective, heading into the cash open, ECB-hawk Holzmann suggested it is too early to discuss the end of stimulus and that a transition from pandemic-era to ‘normal’ stimulus will be discussed in the Autumn, which did not do much in terms of immediate price action across EUR assets at the time; although, may help underpin sentiment against the backdrop of the ECB sources last week which suggested some diverging views on PEPP among the GC members. The macro focus this week undoubtedly falls on the FOMC decision on Wednesday for any signals regarding the potential start of the taper conversation. Back to Europe, most bourses are experiencing mild and broad-based gains with some underperformance experienced in the SMI (+0.1%) and FTSE MIB (+0.2%) – with the former’s gains hampered by a downbeat performance among its heavyweights Nestle, Roche, and Novartis, whilst the FTSE MIB is pressured by Ferrari (-1.0%) following a downgrade at Goldman Sachs. Turning to sectors, Oil & Gas is the clear outperformer as Shell (+2.0%) underpins the sector (14% weighting in the Stoxx 600 Oil & Gas Index) following source reports that it is reviewing the potential sale of its Permian Basin which could fetch over USD 10bln, but a deal is not guaranteed. Travel & Leisure meanwhile was the underperformer at the cash open as England’s lockdown is poised to be extended by four weeks – with a review to take place in two. The Basic Resources sector is now the laggard as LME base metals remain lackluster with a lack of Chinese demand amid the domestic holiday.

Top European News

• Johnson Set to Delay Lifting Covid Rules as U.K. Cases Rise
• Fed- Up Young Staff Fear They Need Offices to Save Their Careers
• Hungary Likely to Back Quarterly Rate Hike, Pleschinger Says

In commodities, the Dollar is narrowly mixed against major counterparts and a bit more divergent vs EM currencies in the run up to Wednesday’s FOMC and some data that could impact along the way, including US PPI, Retail Sales and IP. However, the index has faded just shy of Friday’s 90.612 high and is now probing support or underlying bids under 90.500 within a 90.602-461 band in somewhat thinner trade due to several market holidays overnight (mainland China, HK, Australia and Taiwan).

• NZD/AUD/EUR/CAD – A couple of positives for the Kiwi, as the aforementioned absence of Australian participants to mark the Queen’s Birthday kept the Aud/Nzd cross capped around 1.0800, while Nzd/Usd got an independent fillip via 2021/22 and 2022/32 GDP forecast upgrades from NZIER’s quarterly economist survey to stay firmly above 0.7100 between 0.7122-50 parameters. Conversely, Aud/Usd is only just staying afloat of 0.7700 ahead of RBA minutes. Elsewhere, the Euro is holding just above the 50 DMA vs the Buck (1.2093), but well below option expiry interest at 1.2150 (1.3 bn) and the Loonie is meandering from 1.2168-45 amidst strength in crude prices pre-Canadian manufacturing sales.
• JPY/CHF/GBP – The Yen is straddling 109.70 in wake of firmer final Japanese ip data, while the Franc is hovering above 0.9000 and 1.0900 vs the Euro following a pick up in Swiss producer/import prices, but dip in sight deposits at domestic banks before attention turns to SNB and BoJ policy meetings later this week. In contrast, Sterling is flagging against the Buck and Euro amidst reports that UK PM Johnson will confirm a 4 week delay to lifting the remaining lockdown restrictions that were due on June 21, with Cable under 1.4100 and recent lows, while Eur/Gbp is probing 0.8600 to the upside after a post-ECB retreat as wrangling with the EU on the NI protocol continues.
• SCANDI/EM/PM – Nok/Sek has traversed parity again, as the Norwegian Krona derives traction from Brent topping Usd 73.50 at one stage, while the Swedish Crown takes note of warnings from the Stability Board about considerable risks associated with high property prices. However, the Try has picked up right where it left off last week by reclaiming more losses, and perhaps with assistance from a narrower than anticipated Turkish current account deficit to compound the general technical retracement from record lows. On the flip-side, the Cnh has depreciated without guidance from the PBoC due to China’s Dragon Boat Festival and on recriminations out of Beijing over the G7’s human rights rebuke, while the Rub has handed back post-CBR rate hike gains and Zar reverses alongside Gold that is testing key support levels having failed to retain Usd 1900+/oz status. Specifically, technicians have been underlining the significance of Usd 1855 that aligns with a Fib retracement and is just beneath a recent trough at Usd 1856.18 from June 4.

US Event Calendar

• Nothing major scheduled

DB’s Jim Reid concludes the overnight wrap

I had a lovely hot birthday weekend and although I double bogeyed the last at the end of a good round in a big tournament on Saturday, which ruined by mood in the evening, l’ve had my handicap cut to the lowest it’s ever been at the ripe old age of 47 after playing for 36 years! So there’s hope yet in old age. I’ve set myself an ambitious task to get as close as I possibly can to scratch before my knees, hips, back, shoulder, tennis elbow, bunions, stiff neck, and baldness finally catch up with my swing.

I’ve found in life that the only thing more complicated than unlocking a golf swing is working out bond markets in an era of extreme intervention. Indeed one of the questions I’ve received most from clients over the last week or so is why US Treasuries have rallied so much over recent weeks in the face of what is unambiguously higher inflation data. Well DB’s Francis Yared has helped try to explain this in his piece here from Friday. Let me paraphrase some of the conclusions: (1) weaker NFP which the Fed and market seem more fixated on than the surging quits rate and JOLTS data amongst other stronger labour indicators; (2) a more dovish ECB as 1-2 months ago the market was seriously considering a June taper; (3) an injection of liquidity via the decline in the TGA (Treasury General Account) balance – (see the piece for more); (4) a sharper decline of credit growth in China and industrial commodities stalling even if oil hovers within $2-3 of 6.5 year highs; (5) reduced expectations for the US infrastructure package; (6) Covid Delta variant raising question marks about the steady state level of reopening later this year; and finally (7) the old favourite positioning. The strategic view is still for higher rates and inflation expectations that as a minimum are back in the 1998-2014 range.

Related to this debate the highlight of the week is undoubtedly the FOMC conclusion on Wednesday with tapering discussions, dot plots, latest economic projections and inflation the focus of attention. Otherwise, geopolitics will be heavily in focus. After the G7 summit conclusion permeates into markets, a NATO summit is held today, an EU-US summit takes place tomorrow, before US President Biden meets Russian President Putin on Wednesday in Geneva. In addition, we’ll get an increasing amount of data from the US for May (including PPI and Retail Sales), along with a monetary policy decision from the Bank of Japan.

Starting with the Federal Reserve, their decision on Wednesday represents the next big event on the market calendar, and the first time that we’ll hear from Fed officials since we’ve had another higher-than-expected inflation reading, that saw CPI inflation reach 5.0% year-on-year in May. At the last meeting in April, Fed Chair Powell reiterated his view that the price pressures would be transitory and were associated with the reopening process, so it’ll be interesting to see if he modifies his language on this at all. Nevertheless, markets are buying the Fed’s message for now, with yields on 10yr Treasuries closing at a 3-month low on Thursday. But it’ll be fascinating to see the dot plot from the FOMC as well as their forecasts for inflation, since last time in March the median dot still had rates on hold at the end of 2023, in spite of the fact that inflation was modestly above target then, reflecting their new average inflation targeting approach.

With regards to the Fed the dot plots our economists don’t expect the 2023 median rate forecast to suggest lift-off yet but it could be a close call. Two members would need to join the seven currently expecting a hike by 2023 for the median dot to rise. The press conference will be all about “talking about talking about” for tapering and whether we are there yet. Again our economists expect no formal conditions to have been met to accelerate this but we may get some fresh markers as to their progress on this and what they are looking for. See our economists’ preview here.

Asian markets have started the FOMC week on a mixed note with the Nikkei (+0.59%) up while the Kospi (+0.02%) is flat and India’s Nifty (-0.75%) down. Markets in Hong Kong, China and Australia are closed for a holiday. Outside of Asia, yields on 10y USTs are up +1bps to 1.463% while futures on the S&P 500 are up +0.09% and those on the Stoxx 500 are up +0.32%. Elsewhere, Bitcoin has gained c.+5.4% since Friday as Elon Musk said that Tesla would resume transactions with the cryptocurrency when mining it is done with more clean energy. Crude oil prices are also up c. +0.50% this morning.

The main US data of note this week comes tomorrow with PPI and retail sales. The main focus will be on the PPI components for read throughs as to how transitory the undoubtedly high inflation we have at the moment is. We also have US building starts and permits on Wednesday. Elsewhere, there’s also Chinese data for May on retail sales and industrial production on Wednesday, as well as UK data including May CPI (Weds), retail sales (Fri) along with April unemployment (Tues). The rest of the data is in the day-by-day guide at the end.

One of the most interesting pandemic events of the week comes today with England likely to postpone by four weeks the planned full easing of restrictions from next Monday (June 21st) as the Delta variant has led to the country consistently reporting over 7,000 daily cases over the past week for the first time since the end of February. Bloomberg has reported that there may be some earlier relaxations though of restrictions on weddings and major sporting events to allow larger public gatherings to take place. On a positive note, Germany’s health minister Jens Spahn suggested that the country might end the mask mandate for outdoor activities as Covid-19 infections recede. He added that face masks will remain recommended “when in doubt,” such as when traveling or meeting indoors.

Now to recap last week, inflation remained the prevailing theme especially with the highly anticipated US CPI print on Thursday, which was stronger-than-expected for a second straight month. The S&P 500 gained +0.41% on the week (+0.19% Friday) to new record highs with the majority of the gain coming on Thursday following the CPI release. This was the third weekly gain in a row, as inflation worries have actually ebbed which helped technology shares in particular. Last week saw the cyclical-over-growth trade turn on its head with the NASDAQ gaining +1.85% (+1.06% Friday) while cyclicals sectors such as banks (-3.48%) fell sharply as US yields fell back. The VIX volatility index fell -0.5pts to 15.7, which is the lowest level since the start of the pandemic. European stocks reached a record high of their own as the STOXX 600 finished the week up +1.09%, with the CAC 40 (+1.30%) and IBEX (+1.28%) outperforming other bourses.

Even as the CPI data showed higher pricing pressures in the US, market pricing of inflation expectations ebbed as US 10yr yields finished the week down -10.2bps (+2.0bps Friday) at 1.452% – just off its lowest levels over the last three months. The week’s move was driven by the fall in inflation expectations (-7.9bps) which came in addition to the smaller fall in real yields (-2.2bps). European yields similarly fell back as the ECB decided to maintain the faster pace of PEPP purchases as 10yr bund yields dropped -6.1bps last week and UK gilt yields declined -8.2bps, while yields on OATs fell -5.7bps.

In terms of economic data from Friday, the main highlight was the initial June reading of the University of Michigan survey, which rose more than expected to 86.4 (84.2 expected), compared to 82.9 last month. Inflation expectations were less than last month on a one year basis, 4.0% vs. 4.6% in May, which is still the second highest reading in the last 10 years. Inflation expectations over the next 5-10yr basis fell back slightly to 2.8% from 3.0% in May. The 2.8% level matches expectations from March earlier this year that was last seen back in 2015 prior to that. In Europe the highlight was the UK monthly GDP for April which was up 0.2pp from March at 2.3% (2.4% expected).