Pre-New York open: Skip-hike and pause + China's deflationary funk persists

FOMC

The FOMC will likely pause at its June meeting next week to let the banking sector, debt ceiling debate, and TGA refunding dust settle before it considers another rate hike ultimately. The Fed leadership has signalled that it sees pausing as the prudent course because uncertainty about the lagged effects of the rate hikes it has already delivered and the impact of tighter bank credit increases the risk of accidentally overtightening.

In addition, activity data are still sending conflicting signals at a time when the Fed is searching for evidence that demand growth is slowing below potential; this volatility has clouded the underlying picture of the US economy, making the calibration of "sufficiently restrictive" very tricky.

With the market coalescing on a likely June skip, the burden of July policy proof could fall on next week's CPI or even the July jobs report, although arguably, there will be more than a few chords of Fed Speak wood to chop before then.

China

China's post-reopening recovery has slowed incredibly in the second quarter. April macro data were generally weak ex-services. PMI and trade data for May suggest industrial activity remains soft, and deflationary pressure continues to build, as evidenced by today's weaker PPI print causing investor sentiment to weaken even further. Now people are wondering if we are near rock bottom or not. However, given the very visible deflationary impulse and few signs of improvement, we anticipate this could be a lengthy period of gloom with a policy-induced currency devaluation in the offing. Yes, we think things are that dire.

Oil

With little more than a political chess match in play and not knowing the black knight’s next move, oil markets have flatlined until there is absolute confirmation of a possible Iraq nuclear deal or not.