Bonds Fall on Fed Outlook as European Stocks Decline; Gold Gains

New York (May 31)  Bonds fell as the Federal Reserve moves closer to raising interest rates amid signs inflation is picking up. Oil headed for its longest run of monthly gains in five years, while stocks declined in Europe.

Treasuries retreated in the first full day of trading since Fed Chair Janet Yellen said late Friday that the improving economy meant a rate increase would probably be in order “in the coming months.” European shares dropped for the first time in six days as Volkswagen AG led carmakers lower after reporting a slide in profit at its namesake brand. In China, stocks climbed even after a flash crash in index futures with the Shanghai gauge jumping the most in almost three months. Gold rose for the first time in 10 days.

The Fed’s rate outlook is occupying investors as futures show odds of a hike in July at more than 50 percent while gains in commodity prices from crude to crops bolster prospects for inflation. With officials emphasizing policy tightening is dependent on economic improvement, investors will be scrutinizing payrolls and personal income data due this week.

“The payroll data is probably the key figure that will shape the Fed decision," said Otto Waser, chief investment officer of R&A Group Research & Asset Management in Zurich. “If the payroll data is weaker than what is now expected, it will raise the chance they won’t hike.”

The potential for higher U.S. yields helped send a gauge of the dollar versus major peers to its biggest monthly gain since September 2014. Consumer spending probably picked up in April, economists in a Bloomberg survey said before a Commerce Department report on Tuesday. U.S. employers probably added 160,000 jobs in May and average hourly earnings grew at a 2.5 percent annual pace, another survey showed ahead of Labor Department data on Friday.

Bonds

Treasuries declined, sending the yield on benchmark 10-year notes up by two basis points to 1.87 percent at 7:05 a.m. in New York.

A decline in U.K. bonds, which didn’t trade on Monday due to a public holiday, pushed 10-year yields four basis points higher to 1.47 percent. Yields on similar-maturity German bunds were little changed at 0.18 percent, after a three-basis point increase on Monday that was the most since May 18.

Non-financial companies sold 57 billion euros ($63 billion) of debt in May, making it the biggest month for euro-denominated issuance this year and the second-busiest on record, according to data compiled by Bloomberg.

Commodities

West Texas Intermediate crude was up 0.2 percent from Friday’s close in the U.S., to $49.42 a barrel, as traders await Thursday’s meeting of OPEC suppliers. WTI has climbed 7.7 percent in May, its fourth straight monthly advance and the longest stretch of gains since 2011.

Militant attacks have cut Nigerian oil supply to the lowest level in more than two decades while Canadian output is still stabilizing after sliding amid wildfires. Libya’s Petroleum Facilities Guard captured a town near the Es Sider and Ras Lanuf oil-loading terminals after fierce clashes with Islamic State militants.

Soybeans were set for a third monthly gain amid speculation that reduced supply from South America will spur increased demand from the U.S. Soybeans for July rose 0.3 percent to $10.89 3/4 a bushel on the Chicago Board of Trade. The contract is up 5.8 percent this month and 26 percent this year.

Raw sugar for July advances to highest since November 2014 amid congestion at ports in Brazil, the world’s biggest sugar grower and producer. Sugar futures rose 0.5 percent in the fourth straight day of gains on ICE Futures U.S. in New York.

Gold for immediate delivery jumped 0.5 percent to $1,210.93 an ounce, after sliding almost 6 percent over the previous nine days as the prospect of a U.S. rate hike diminished the precious metal’s appeal.

Copper declined 0.7 percent and lead was down 0.5 percent as the London Metals Exchange started trading for the week, while nickel surged 1 percent.

Stocks

The Stoxx Europe 600 Index lost 0.3 percent. The measure is still on course for a 2.2 percent gain in May, its biggest monthly advance since November.

Volkswagen slid 3.3 percent on Tuesday, leading a gauge of carmakers to the worst performance of the 19 industry groups on the European equity benchmark.

Investors are focusing on monetary policy this week, with the European Central Bank announcing its rate decision on Thursday, followed by a press conference by President Mario Draghi.

The Shanghai Composite Index jumped 3.3 percent, the most since March 2. Contracts on the CSI 300 Index dropped as much as 10 percent at around 10:42 a.m. local time, recovering almost all of the losses in the same minute. The move had little effect on the underlying CSI 300, which rose 3.4 percent.

For more on Chinese equity trading and mounting short bets, click here.

Chinese stocks rallied as Goldman Sachs Group Inc. said it was likely the nation’s shares would be included in MSCI Inc.’s global benchmark indexes. The odds of winning MSCI inclusion have increased to 70 percent from 50 percent just last month, thanks to new rules aimed at curbing trading halts and a clarification by the regulator about beneficial ownership rules, Goldman Sachs said Tuesday.

Currencies

The yen was little changed at 111.03 per dollar. The dollar took a breather, with the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, also little changed. The index is still up 3.6 percent in May, after retreating over the previous three months.

Bets on the Fed increasing rates at next month’s meeting have jumped to 30 percent, from 12 percent a month ago, while odds of a move in July are at 54 percent, up from 26 percent, according to Fed funds futures tracked by Bloomberg.

The Australian dollar jumped 0.8 percent Tuesday after data showed the contribution of net exports to first quarter gross domestic product and April building approvals both exceeded analysts’ estimates. It’s still poised for a second monthly decline after the central bank unexpectedly lowered the benchmark rate to a record 1.75 percent on May 3. Policy makers will next meet on June

 7.

Source: Bloomberg