Last night Forex reflected weakening US data, falling inflation and falling commodities. The DXY was firm, as was the EUR:

The Australian dollar has been hit on all major DM crosses:

Oil is on the moon thanks to heavy levies on US stocks. Gold is caput:

Base metals have been hammered:

Big miners too:

Emerging market equities have been affected:

Relaxed Junk:

US yields were the subject of an offer:

But the stocks still pulled back:

Westpac has the data envelope:

Event wrap

retail sales in the United States in May were weaker than expected, falling 1.3% m / m (est. -0.7% m / m), although April was revised up to + 0.9% m / m compared to zero. The core measure – controlling sales – fell 0.7% m / m (est. -0.5% m / m), with an April revision from -1.5% m / m to -0 , 4% m / m.

Industrial production in May rose 0.8% m / m (est. + 0.7% m / m), but April was revised down to + 0.1% m / m from + 0.7% m / mr. Capacity utilization increased to 75.2% (estimated at 75.1%) after a revised downward rate of 74.6% in April (initial 74.9%).

PPI inflation in May rose 0.8% (est. + 0.5% m / m), with most gains in goods (+ 1.5% m / m). The overall increase of + 6.6% y / y is the largest since November 2010. The measure excluding food and energy increased by 0.7% m / m (est. + 0.5% m / m).

the NY / Empire Fed Manufacturing Activity Survey fell to 17.4 (est. 22.7, before 24.3), with mixed components. Trust of NAHB home builders fell to a still high level of 81 (vs. unchanged at 83), citing concerns of “higher costs and declining availability for softwood lumber and other building materials.”

Eurozone trade the surplus narrowed in April to € 9.4 billion (estimated at € 15.0 billion), but from € 18.3 billion revised upwards (initially € 13.0 billion) euros).

Jobs in UK was firm. April unemployment fell to 4.7% (from 4.8%), as expected, and although the 3m / 3m job change of 113k was lower than the estimate of 135k, unemployment claims in May fell -92.6K from a revision of -55.8k (initially -15.1k) in April.

Outlook for the event

Australia: May Leading Westpac-MI Index Is expected to see a further slowdown with several components registering declines over the month, with Vic’s latest lockdown shocking consumer confidence and a notable pullback in housing approvals (-8.6% vs. 18.9% last month) . On the other hand, the index’s growth rate will continue to benefit from offsetting support from a rising stock market and dynamic commodity prices (up 5.8% in Australian dollars).

New Zealand: We are waiting for the annual Current account deficit to widen to 2.1% of GDP in the March quarter, after shrinking to a 19-year low of 0.8% at the end of last year. The main factor is the absence of a usual increase in spending by foreign visitors at this time of year. This will see the deficit widen further over the remainder of 2021, with the border not fully opening up until next year.

China: May retail sales (f / c market: 26.3% year-on-year), industrial production (f / c market: 18.0% over the current year), and capital investment (f / c market: 17.0% yoy) is expected to reveal strong consumer spending, while production and income are supported by domestic and foreign demand.

we: May starts are expected to grow by 5.2%, while building permit is expected to decline by 0.2%; going forward, high lumber costs pose a risk to the outlook for residential construction activity. May import price index is expected to increase by 0.7% on the strength of energy import prices. June FOMC meeting will be interesting for several reasons. First, after the meeting, the Committee’s revised forecast will be provided, guiding its main expectations for the next three years. Second, President Powell’s press conference will give a good indicator of the Committee’s confidence in its central projection for both inflation and the labor market – the two central concerns of the FOMC. Third, for these two aspects of the economy, a risk assessment will be provided. This will help determine the magnitude of the impact that the main risks are likely to have on the policy outlook, if they were to occur.

As Goldman Sachs so aptly described it a few weeks ago when he argued that China no longer matters to commodity prices, the sources of demand for metals are now being driven by the DM. Well, that stimulus is quickly fading as the US fiscal cliff looms.

Of course, the argument sucks. All that matters for commodity prices is Chinese demand and it is set to drop significantly as credit tightens drastically. What matters now is how fast the United States is slowing alongside China. If the two converge, then the bursting of the commodity price bubble that we are witnessing at the start will quickly turn into an outright fear of growth that will lead to emerging market debt and equities.

The juries are still discussing it. For now, let’s recognize that easing US demand will help unwind the global inventory supercycle and its price frictions on the supply side. In turn, falling inflation (and demand) will burst Wall Street’s commodity bubble. Today we are seeing steep declines in lumber, soft materials, increasingly base metals, especially copper and other markets.

This is just the start in my opinion. Bulks are next as China joins the US slowdown, especially in its construction sectors.

Last night two facts stood out in BofA’s monthly survey of the funds that matter for it. First, three quarters of fundies agree that inflation is temporary:

Yet almost all of them are overweight inflation, especially dirt:

In short, the coming reversal in inflation and commodity trading is shaping up to be violent with the crown blocking the exit all at once.

What makes me more bearish the Australian dollar.

David Llewellyn Smith
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