With a paucity of potential volatility catalysts on the week’s calendar, markets remain broadly rangebound this morning. Equity futures are inching down ahead of the opening bell, Treasury yields are practically unchanged, and the dollar’s recent gains are fading relative to the euro and pound.
Chinese exports fell dramatically in May, suggesting that a long-expected post-pandemic drop in Western goods demand is taking a toll on the world’s second-largest economy. According to data released by the Customs Bureau last night, exports fell -7.5 percent year-over-year in May, well beyond the -0.4 percent consensus, and the worst print since January. The country nonetheless recorded a $66 billion trade surplus as imports fell 4.5 percent.
Commodity prices are back under pressure, even as investors grow more convinced of an eventual Chinese stimulus campaign. Brent, the global crude benchmark, is trading below levels that prevailed ahead of this weekend’s OPEC+ meeting.
The Australian dollar stalled in last night’s session after updated numbers showed the economy slowing in the first quarter, suggesting that the central bank’s monetary tightening campaign is beginning to take a toll on activity levels. Data released by the Australian Bureau of Statistics showed gross domestic product growth slipping to 2.3 percent year-over-year in the first quarter, down from 2.6 percent in late 2022 as activity across a number of rate-sensitive sectors began to weaken. The Australian yield curve has undergone a bear flattening process since Monday’s surprise rate hike, suggesting that market participants are growing more skeptical on the growth trajectory.
We don’t expect an explosive reaction to this morning’s Bank of Canada decision. We still consider a pause most likely, but given that markets are already positioned for a summer move, the difference between a “hawkish hold” and an outright hike shouldn’t be sufficient to decisively tilt front-end rate differentials in the Canadian dollar’s favour. And, with Canada’s private sector debt-to-gross domestic product ratio at 217 percent – well above Australia’s 177 percent – we suspect higher rates today will simply push yield curves into deeper inversion as investors bet on something breaking in the real economy. If anything, the loonie might face stiffer headwinds than markets are currently anticipating.
From a broader perspective, a degree of complacency may be setting in. Major US equity indices are up almost 20 percent from their October lows, and the CBOE VIX volatility index – sometimes known as Wall Street’s “fear gauge” – is holding just above the 14 mark after closing at its lowest since before the pandemic hit in 2020. Treasury yields are stabilizing. And implied 3-month volatility in most major exchange rate pairs is back to pre-war levels.
This sense of calm could persist. Recession fears are on the wane, most major central banks look likely to end rate hikes in coming months, and volatility levels have historically tended to subside through the summer season. But with liquidity conditions shifting direction, global demand showing signs of rolling over, and the lagging effects of a historic tightening cycle largely yet to appear, the potential for a shock in the late summer or early autumn is growing.