Surprise Drop In U.S. ISM Caught The Market Wrong-Footed

We will continue to scrutinise Fed speeches for signs of an imminent scale down of its asset purchases. Kansas City Fed president Esther George will be speaking today; it will be no surprise if she argues in favour of terminating the Fed's QE, as she is regarded as a hawk, and has been very critical of Fed's QE. The view of board member Sarah Raskin will be more interesting as she is regarded as neutral.

If U.K. PMI for the construction sector also comes out stronger than expected, it will add further ammunition to the argument that additional easing will not be needed in the U.K.

Danish currency reserve data are expected to show that Danmarks Nationalbank (DN) did not have to intervene to support DKK in May. DN did not need to intervene in the FX markets since January, which in turn has killed speculation about a near-term rate hike.

Selected market news

The surprise drop in the U.S. ISM manufacturing index to 49 - the lowest since June 2009 - caught the market wrong-footed, but does not appear to have truly changed investor expectations about the potential for a reduction in FED QE. The details were also weak, with the new orders index dropping to 48.8 and the inventories index rising to 49.

The 10-year U.S. treasury yield initially fell almost 10bp, but took back about 5bp later in the session to trade around 2.11% overnight. The DXY dollar index initially fell 1% but has also reversed some of the initial drop overnight.

If the bond market was caught wrong-footed, so was the FX market with IMM data showing long dollar positions at record longs. The biggest gainers have been the recent biggest losers with especially ZAR, HUF, AUD and NZD higher. The USD/JPY broke below 100 for the first time in four weeks.

The Reserve Bank of Australia (RBA), as expected, kept the policy rate unchanged at 2.75% but remains on an easing bias stating that 'the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand'.

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