• Asian equity markets traded mixed with the region cautious following the mostly negative lead from the US
• April FOMC Minutes gave a nod to potential taper discussions in the approaching meetings
• In FX, the DXY is relatively steady above 90.00, EUR/USD remains sub-1.22 and GBP/USD sits on a 1.41 handle
• WTI crude futures have stabilised around USD 63.50bbl, spot gold prices remain elevated
• Looking ahead, highlights include US IJC, Philadelphia Fed Business Index, SARB rate decision, ECB's Lane, Lagarde, BoE's Cunliffe, Fed's Kaplan, supply from Spain, France and the US

FOMC MINUTES

FOMC Minutes stated that a number of participants suggested if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases. Participants also noted that it would likely be some time until the economy had made substantial further progress toward the Committee's maximum-employment and price-stability goals and that consistent with the Committee's outcome-based guidance, purchases would continue at least at the current pace until that time.

Participants judged that the Committee's current guidance for the federal funds rate and asset purchases was serving the economy well, while they also noted that the expected surge in demand as the economy reopens further, along with some transitory supply chain bottlenecks, would contribute to PCE price inflation temporarily running somewhat above 2% and a number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year. Furthermore, a couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction. (Newswires)

CORONAVIRUS UPDATE

NIH’s Dr Fauci said we will almost certainly need COVID-19 booster jab within a year or so after getting the primary shot, while there were separate comments from the Pfizer (PFE) CEO who expects new data on booster shots within the next two months and said that a booster will like be needed within 8-12 months. (Newswires)

FDA authorized a longer refrigerator storage time for thawed Pfizer (PFE) / BioNTech (BNTX) COVID-19 vaccines prior to dilution which would increase the availability of the vaccine, whereby it stated that undiluted, thawed Pfizer/BioNTech vaccines are to be stored at 2-8 degrees celsius for up to 1 month. (Newswires)

UK PM Johnson Boris is increasingly optimistic that COVID-19 restrictions could be removed on June 21st as scheduled after early data suggested the Indian variant was not spreading as fast as had been feared. (The Times)

UK Health Secretary Hancock said it is a matter for the EU and that they will be working together on proposals when asked about fully vaccinated people travelling to the EU. Hancock also stated that in the long term, we need to reopen air travel but added that we are not there yet on vaccinations and need to take a cautious approach. There were separate reports that the UK plans to roll out COVID vaccines to all over-18s in June. (Newswires/Telegraph)

Japan's Health Ministry is likely to approve AstraZeneca (AZN LN) and Moderna (MRNA) COVID-19 vaccines with the Minister to announce this on Friday but may limit recommended groups for the AstraZeneca vaccine due to blood clot concerns. In other news, Japan is reportedly planning a state of emergency for Okinawa. (NHK/FNN)

ASIA

Asian equity markets traded mixed with the region cautious following the mostly negative lead from the US where risky assets took an early hit alongside crypto turmoil and commodity losses. FOMC Minutes which were viewed as hawkish after a number of participants suggested the potential for tapering discussions if rapid progress is made towards the Fed’s goals. ASX 200 (+1.3%) was positive with the index led higher by strength in tech following similar outperformance stateside and with most sectors proving to be resilient aside from the mining and energy industries due to the recent slump in underlying commodity prices. Nikkei 225 (+0.3%) swung between gains and losses with the index indecisive after the recent whipsawing in its currency and despite the mostly better-than-expected data releases in which Machinery Orders were mixed but trade figures topped forecasts and showed the fastest pace of increase in Exports since 2010. Hang Seng (-0.8%) and Shanghai Comp. (-0.3%) were lower amid notable losses in commodity-related shares as metal futures in Shanghai slumped following recent comments from China's Cabinet which stated it is paying great attention to the negative impact from surging commodity prices and will curb unreasonable price increases, as well as a crackdown on abnormal transactions. The PBoC also announced its latest decision on the Loan Prime Rates which were maintained at 3.85% and 4.65% for the 1yr and 5yr benchmarks, respectively, although this was widely expected given that the central bank recently maintained the rate on its Medium-term Lending Facility which is seen as an indicator of the central bank's intentions for the LPR. Finally, 10yr JGBs traded rangebound amid the indecisive risk tone in Japan although have largely ignored the slump in USTs that was triggered by the FOMC Minutes, while the BoJ were also present in the market for nearly JPY 1tln of JGBs consisting mostly of 1yr-3yr and 5yr-10yr maturities.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4464 vs exp. 6.4482 (prev. 6.4255)

Chinese military said a US warship illegally entered Chinese waters near the Paracel Islands in the South China Sea and that it resolutely opposes US warships entering its territory without permission. In relevant news, there were earlier comments from US President Biden who said they need to defend marine law in the South China Sea, the Arctic and the Gulf of Mexico. (Newswires)

• PBoC 1-Year Loan Prime Rate (May) 3.85% vs Exp. 3.85% (Prev. 3.85%)
• PBoC 5-Year Loan Prime Rate (May) 4.65% vs Exp. 4.65% (Prev. 4.65%)
• Japanese Trade Balance Total (JPY)(Apr) 255.3B vs. Exp. 140.0B (Prev. 662.2B)
• Japanese Exports YY (Apr) 38.0% vs. Exp. 30.9% (Prev. 16.1%)
• Japanese Imports YY (Apr) 12.8% vs. Exp. 8.8% (Prev. 5.8%)
• Japanese Machinery Orders MM (Mar) 3.7% vs. Exp. 6.4% (Prev. -8.5%)
• Japanese Machinery Orders YY (Mar) -2.0% vs. Exp. -2.6% (Prev. -7.1%)

UK/EU

UK pay growth in April sharply picked up amid the easing of lockdown, according to reports citing XpertHR. (FT)

British SMEs are reportedly facing GBP 180mln of costs from additional red tape due to the incoming VAT reforms in the EU which will be introduced in July. (FT)

ECB's Schnabel said the ECB sees no reason to raise interest rates as euro zone inflation is expected to fall next year. (Newswires)

FX

In FX markets, the DXY was flat overnight but held on to the prior session’s gains and is back above the 90.00 level in the aftermath of the hawkish FOMC Minutes which noted that a number of participants suggested the potential for tapering discussions if rapid progress is made towards the Fed’s goals. Furthermore, some participants also implied that the expected surge in demand from a reopening of the economy, alongside transitory supply chain bottlenecks, would contribute to PCE price inflation temporarily running somewhat above 2% and that if supply chain bottlenecks and input shortages are not resolved quickly, these factors could put upward pressure on prices beyond this year. EUR/USD was subdued after giving up the 1.2200 handle post-FOMC Minutes and after recent comments from ECB's Schnabel who stated that the ECB sees no reason to raise interest rates as euro zone inflation is expected to fall next year, while GBP/USD languished at the prior day’s lows although the pair has just about found a floor at 1.4100. USD/JPY was indecisive but with price action tepid in comparison to the recent fluctuations through the 109.00 level yesterday and antipodeans were contained by the recent commodity slump and mixed jobs data from Australia which showed a surprise contraction of to the headline Employment Change although this was solely due to part-time workers as full-time employment increased for the month and the Unemployment Rate also declined to 5.5% from 5.6%, while NZD/USD was uneventful with the currency pair unmoved despite the budget announcement which contained upgrades in GDP growth forecasts and suggested a stronger than expected fiscal position.

New Zealand Finance Minister Robertson stated the long-term effects of the pandemic are not as severe as previously thought and weekly benefit rates were increased in the budget by between NZD 32-55 per adult. Furthermore, New Zealand DMO sees 2021/22 bond issuance of NZD 30bln vs prev. forecast of NZD 30bln in the Half-Year Economic and Fiscal Update, while it sees 2021 GDP growth of 2.9% vs prev. forecast of 1.5% in HYEFU. (Newswires)

• Australian Employment (Apr) -30.6k vs. Exp. 15.0k (Prev. 70.7k)
• Australian Full Time Employment (Apr) 33.8k (Prev. -20.8k)
• Australian Unemployment Rate (Apr) 5.5% vs. Exp. 5.6% (Prev. 5.6%)
• New Zealand Economic OBEGAL Forecasts -15.13B (Prev. -21.58B)
• New Zealand Net Debt of GDP Forecast 34.0% (Prev. 39.7%)
• New Zealand Budget Balance (NZD) -25.28B (Prev. -40.18B)

COMMODITIES

WTI crude futures stuck near the USD 63.50/bbl level after having partially recovered from the prior day's early slump that was triggered by broad losses across risky assets, as well as increased confidence of reaching an Iranian nuclear deal although Iran's chief nuclear negotiator later noted that there are still issues remaining. Gold prices were choppy but ultimately pared their gains in the aftermath of the hawkish FOMC Minutes, while copper prices languished alongside heavy declines in Chinese commodity prices in which Dalian iron ore futures, Shanghai Rebar and Hot-Rolled Coil futures suffered losses of around 7% at the open of Shanghai metals trade after recent comments from China's Cabinet that it is paying great attention to the negative impact from surging commodity prices and will curb unreasonable increases in commodity prices, as well as crackdown on abnormal transactions.

A Union at Chile's Escondida Mine said it is prepared for a lengthy strike if BHP (BHP LN) sticks to its historic "awful" attitude, while it is currently working on a contract draft which it will present to members. (Newswires)

GEOPOLITICAL

A ceasefire between Israel and Hamas could occur as soon as Friday amid increasing pressure for a halt in the conflict from US and other nations, according to reports in WSJ citing people involved in the discussions. It was separately reported that US Secretary of State Blinken discussed efforts to cease the violence with Israeli Foreign Minister Ashkenazi, while Blinken stated that the US expects to see a de-escalation towards a ceasefire. (Newswires/WSJ)

Israeli PM Netanyahu previously commented that operations will continue until calmness is restored, while other reports noted that Defense Minister Gantz ordered to accelerate the IDF's operational actions against terrorist targets in the Gaza Strip. There were later comments from a Senior Hamas official that he estimates a ceasefire will happen within a day or two and thinks it will be successful, although a Hamas source told Sky News that intensive talks are ongoing but no confirmation of a ceasefire yet, in response to suggestions that a ceasefire was close. (Sky News/Walla News/Kann News)

US Secretary of State Blinken said the US seeks stable and predictable relations with Russia, while he added that it is no secret the sides have their differences but there are many areas where US and Russian interests intersect. Blinken also stated that the US will respond when Russia acts aggressively against the US, its partners or allies and that the world would be a more secure place if US and Russia can work together. Furthermore, a US official said there were no breakthroughs in the meeting between US Secretary of State Blinken and Russian Foreign Minister Lavrov and that work on the relationship will occur in the weeks and years ahead. There were also comments from Russian Foreign Minister Lavrov that the US and Russia have serious differences in assessment of the international situation but added we are ready to discuss all issues in which discussions should be on the basis of mutual respect. Lavrov added that his meeting with US Secretary of State Blinken was constructive and that Blinken showed a desire to sort out relations, while they will both prepare proposals for a Putin-Biden meeting and he hopes both leaders will define the ways for further improvement in relations but declined to answer a question on whether Russia has agreed on a summit with the US. (Newswires)

UK, French and German Senior Diplomats said success in Iran nuclear talks is not guaranteed and that there are still some very difficult issues ahead, while they added that it is critical that Iran allow the IAEA to continue its necessary JCPOA monitoring and verification work. There were also later comments from the Irish Foreign Minister that progress has been made in nuclear talks and that we are in a much better space than a few months ago but a deal on the nuclear issue is far from done. (Newswires)

Iran's Deputy Finance Minister stated that the decision about whether to extend the temporary deal will be taken to Tehran and it was also reported that IAEA Director General Grossi currently has no plans to travel to Tehran for talks, while Iran's chief nuclear negotiator stated that there are still issues remaining in discussions with the US. (Newswires/NHK)

US waived sanctions on Nord Stream 2 AG and its CEO due to national interest concerns as waivers would allow the US to rebuild relations with European allies, while the US sanctioned 4 Russian vessels and 4 Russian entities for helping build the Nord Stream 2 pipeline, according to the US State Department. Furthermore, US Secretary of State Blinken commented that the US will continue to oppose the completion of the Nord Stream 2 project although reports also noted that the US said halting the Nord Stream 2 pipeline is a long shot. (Newswires)

US

Treasuries were offered, led by the belly, after FOMC Minutes revealed potential tapering discussions ahead, seeing markets embed more term premia, offsetting the earlier flight-to-quality bid. By settlement, 2s +0.6bps at 0.157%, 5s +3.7bps at 0.858%, 7s +4.0bps at 1.327%, 10s +3.4bps at 1.676%, 20s +2.5bps at 2.294%, 30s +1.5bps at 2.379%; TYM1 volumes were decent. 5yr TIPS +7.5bps at -1.814%, 10yr TIPS +7.7bps at -0.830%, 30yr TIPS +4.5bps at 0.043%. SOFR and EFFR unchanged at 1bp and 6bps, respectively. Duration began selling again into the 20-year auction in which the USD 27bln offering tailed by 1bp (vs 0.2bp avg.) and covered 2.24x (vs avg. 2.34x), while Dealers took more than average amid disappointing Indirects participation (a proxy for foreign demand), akin to last week's 30s auction rather than the more successful 10s. Yields cheapened gradually, then suddenly, as participants dug into the April FOMC Minutes, which made explicit mention for the first time post-COVID of "a number" of participants suggesting tapering discussions to be had in the upcoming meetings, while a number also expressed the possibility that inflation could be more sustained than initially thought. Cash 10s peaked just above 1.69% into the future settlement, with the belly weakest, likely due to the potential signalling of tapering being a precursor to eventual hiking in the medium-term. T-note (M1) futures settled 11+ ticks lower at 132-01.

Fed's Bostic (2021 voter) said the economy is transitioning to a recovery and out of the pandemic, although he sees a lot of volatility over the next several months and said it is expected that economic data will fall short of forecasts. Furthermore, he stated that if the Fed sees substantial progress, he will advocate for changing policy but added that they are not there yet. (Newswires)

Fed's Bullard (2022 voter) said the US may be getting close to the point where the pandemic is over, then attention could turn to post-pandemic monetary policy and suggested there is perhaps a 50-50 chance that the US is moving into a high productivity regime which is something that hasn't been seen since the mid-1990s, while he added the question of MBS purchases during the housing boom is a "good topic" once the Fed opens a broader taper discussion. (Newswires)