• Asian equity markets traded cautiously following the tech-led declines in the US and with sentiment constrained by US-China tensions
• RBI kept rates unchanged as expected but eventually announced further QE purchases
• DXY remains firm above 90.50, EUR/USD holds on to 1.21 status and GBP/USD trades sub-1.41
• Fed's Williams suggested it makes sense for the Fed to be thinking through options it has in the future but doesn't think it is currently the time to take action
• US President Biden is reportedly not backing away from a 28% corporate rate, according to CNBC sources
• Looking ahead, highlights include EZ and UK Construction PMIs, US and Canadian Jobs Reports, US Factory Orders, Fed’s Powell, ECB’s Lagarde, Villeroy, de Cos, PBoC’s Yi Gang, BoJ’s Kuroda, SNB’s Jordan. RBNZ’s Orr

CORONAVIRUS UPDATE

UK government refrained from opening up any more destinations for quarantine-free trips, while it moved Portugal from the green list to amber and seven countries were added to the red list. In relevant news, Public Health England said early data in England and Scotland suggested an increased risk of hospitalisation from the Indian variant than the UK variant. (Newswires/Mirror)

Chicago plans to fully reopen on June 11th, according to Mayor Lightfoot. (Newswires)

ASIA

Asian equity markets traded cautiously following the tech-led declines in the US and with sentiment constrained by US-China tensions, as well as the looming NFP jobs data. ASX 200 (+0.4%) was initially subdued with underperformance in the mining-related sectors after underlying metal prices suffered the ill-effects of a stronger dollar, although the index managed to recover helped by strength in healthcare and resilience in the top-weighted financials industry. Nikkei 225 (-0.4%) was dragged lower amid the early broad cautious tone and a predominantly firmer currency which overshadowed the better-than-expected Household Spending data for Japan that printed the largest Y/Y increase since comparable data was made available in 2001. Hang Seng (+0.2%) and Shanghai Comp. (+0.1%) initially declined amid ongoing frictions between the world’s two largest economies after US President Biden signed an order which expanded on the Trump investment ban and included 59 companies linked to China's military and surveillance technology, while there were also reports that China’s market regulator warned another eight sharing-economy companies regarding unclear prices which resulted in early heavy pressure for Meituan shares. However, Chinese markets gradually recovered, helped by easing of mainland money market rates and with China also proposing an appropriate reduction in stamp duty. Finally, 10yr JGBs were lower on spillover selling from T-notes after the strong data stateside and with some questions raised following the Fed’s recent plan to unwind its corporate bond holdings, while a lack of BoJ presence in the market today also contributed to the constrained demand for Japanese government bonds.

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 6.4072 vs exp. 6.4056 (prev. 6.3811)

US President Biden signed a new order banning securities trading in 59 companies linked to Chinese military or surveillance technology in which the new Treasury list will replace the existing department of defence lists of companies with alleged ties to Chinese military. The new order is part of a broader series of steps by the administration to counter China and will amend the Trump order to make it broader and more legally defensible in court, while the Treasury Department will oversee the enforcement of the list which will be updated on a rolling basis with new companies and will include CNOOC, Huawei, SMIC, China Mobile, Zhonghang Electronic, Jiangxi Hongdu Aviation, China Unicom, China Telecom. (Newswires)

Hong Kong police have detained a democracy leader on the anniversary of the Tiananmen Square Incident, while other reports noted that Hong Kong are to deploy 7,000 police to prevent protests on the Tiananmen anniversary. (Newswires/AFP)

RBI kept the Repurchase Rate and Reverse Repo Rate unchanged at 4.00% and 3.35%, as expected, through unanimous decision and maintained an accommodative stance which it will continue with as long as necessary. RBI Governor Das stated that April inflation brought with it some relief and policy elbow room but also noted that the second wave of the virus and restrictions posed upside risks for inflation. Furthermore, he announced the RBI will conduct another GSAP 1.0 operation of INR 400bln on June 17th and will undertake GSAP 2.0 in Q2 of fiscal 2021/22 with INR 1.2tln of GSAP to be conducted in Q2, while he also announced a INR 150bln on tap liquidity window for contact intensive sectors and INR 160bln special liquidity facility to assist MSMEs. (Newswires)

• Japanese All Household Spending (Apr) M/M 0.1% vs. Exp. -2.2% (Prev. 7.2%)
• Japanese All Household Spending (Apr) Y/Y 13.0% vs. Exp. 9.3% (Prev. 6.2%)

UK/EU

Irish Foreign Minister Coveney said the UK should align with the EU for Northern Ireland border checks to be relaxed. (Telegraph)

British officials are "cautiously optimistic" that a broad outline on a global taxation can be agreed on at the G7 finance summit on Friday and Saturday, according to sources. (FT) Note, this is in-fitting with recent commentary. Finance ministers are expected to announce an agreement in principle over the weekend.

FX

In FX, the DXY remained firm at 90.50 with the currency helped by the cautious risk tone, as well as the recent better-than-expected data releases including ISM Non-manufacturing PMI and strong ADP Employment heading into today’s NFP data, while lower Initial Jobless Claims further added to the encouragement. There were also several comments from Fed speakers heading into the blackout period beginning this weekend including from Fed's Williams who suggested it makes sense for the Fed to be thinking through options it has in the future but doesn't think it is currently the time to take action, and Fed’s Kaplan reiterated his taper call in which he stated it is "critical" to start talking about adjusting asset purchases. EUR/USD remained lacklustre and firmly below the 1.2200 handle after losing out to the greenback, while GBP/USD struggled to stay afloat of 1.4100, which was not helped by the surprise decision in the government’s COVID travel traffic light update whereby no new destinations were added to the green list and Portugal was also downgraded to amber. JPY-crosses were mostly lacklustre due to their base currencies and the cautious risk tone although USD/JPY held on to most of the recent gains on the back of the stronger USD, and antipodeans languished following the declines in commodity prices and a weaker CNY fix. Elsewhere, INR was choppy following the staggered release if the RBI policy announcement where the central bank kept rates unchanged as expected but eventually announced further QE purchases valued at INR 400bln through its GSAP 1.0 program later this month and INR 1.2tln through GSAP 2.0 next quarter which briefly weakened INR before the currency gradually reverted to pre-announcement levels.

COMMODITIES

WTI crude futures consolidated after the prior day’s choppy performance where prices oscillated through the 69.00/bbl level as headwinds from a firmer greenback and risk averse mood, were counterbalanced by strong jobs data and with the EIA report posting a larger than expected draw in headline crude stockpiles, while it was also reported that Saudi Arabia raised its OSP to Asia and Northwest Europe but kept it unchanged for July. Gold prices were lacklustre following the prior day’s slump beneath 1900/oz owing to the stronger greenback and with focus on the incoming NFP data, while copper traded sideways and only managed to partially nurse yesterday's losses amid the broad cautious mood.

Shell's Deer Park, Texas refinery (340k bpd) reported unauthorized discharge into Patrick's Bayou, while an onsite response team was assessing the situation and will take appropriate action to mitigate the discharge. (Newswires)

US

The belly led the TPLEX lower on Thursday amid touted positioning into Friday's payrolls after decent ADP data today as the market prepares for a potential Fed pullback. By settlement, 2s +1.3bps at 0.160%, 5s +4.5bps at 0.841%, 7s +4.0bps at 1.297%, 10s +3.2bps at 1.623%, 20s +1.5bps at 2.217%, 30s +1.5bps at 2.295%; TYU1 volumes were low. Inflation breakevens narrowed: 5yr TIPS +7.9bps at -1.747%, 10yr TIPS +5.0bps at -0.823%, 30yr TIPS +2.3bps at -0.031%. SOFR and EFFR unchanged at 1bp and 6bps, respectively. As US players arrived T-Note selling picked up some traction, perhaps some catch up to the selling in Europe, not to mention any pre-positioning for Friday's NFP report, or any jitters around the Fed's announcement on Wednesday to begin winding down its Secondary Market Corporate Credit Facility. There was a modest knee-jerk lower reaction to the ADP printing +978k (exp. 650k), a positive signal for Friday, although note the ADP data is far from a perfect reflection of the BLS report, and misleads more often than not. Fresh pandemic lows in Initial Claims right after - 385k vs exp. 390k - supported the UST sell-off, but bear in mind it won't be reflective for Friday's NFP given it is not for the survey week, and the report was also overshadowed by a surprise rise in the Continued Claims print (3.771mln vs exp. 3.615mln). The selling today was led by the belly, where IFR noted big curve bets at play including fresh 5s30s flatteners, but said there were also lots of steepener unwinds ahead of NFP. Those flows were reflected with the 5s30s over 2.5bps flatter today, while the 2s30s curve was little changed. Furthermore, TIPS yields cheapened more acutely, seeing inflation breakevens narrow, which could perhaps be a nod to rising expectations of the Fed gearing up to pare back accommodation (tapering/hikes) - one could view the SMCCF wind-down announcement as a first step to policy "normalization". T-notes (U1) settled 11 ticks lower at 131-19.

Fed's Williams (voter) said he expects to see strong GDP growth this year and the overall picture is very positive, while he added that it makes sense for the Fed to be thinking through options it has in the future but doesn't think the time to take action is now and said it is going to take some time for businesses and others to adjust. Williams also commented that people want to get back to work but it will take several months to see progress and that the economy is in a good trajectory but still quite a ways off from reaching substantial further progress. (Newswires)

Fed's Quarles (voter) said runs on prime money funds and commercial paper are particularly concerning and should be regulatory focus and that the Fed should only turn on countercyclical capital buffer in times of significant irrational exuberance. (Newswires)

Fed's Kaplan (2023 voter) said it is "critical" to start talking about adjusting asset purchases and reiterated he would rather see the Fed take its foot a little off the gas pedal sooner rather than later. Furthermore, he stated substantial progress means evidence we've weathered the pandemic, which we are seeing, and also means progress on employment and inflation goals, while he does not think the housing market needs support at the level the Fed is providing and said it would be healthy to discuss MBS purchases in light of the housing market. (Newswires)

US President Biden is reportedly not backing away from 28% corporate rate and instead, he suggested that GOP senators pair his previous proposal for a 15% minimum tax on corporate book income with the "core infrastructure" that Republicans want, according to CNBC citing sources. There were also separate comments from the White House that President Biden believes we should continue to look at raising the corporate tax rate and has ruled out imposing user fees to pay for infrastructure plans, while he does not see Monday as a deadline for infrastructure talks. (Newswires/CNBC)

US Commerce Secretary Raimondo said the infrastructure bill has to be "big and bold" and be USD 1tln or more, while US Senate Minority Leader McConnell said GOPs are still hoping to come to an agreement with US President Biden on a significant infrastructure package that is fully paid for and that an infrastructure deal could be maybe USD 1tln. (Newswires/CNN)