Tuesday June 9

Stocks are little changed as economic data continues to point to tightening sooner rather than later. The S&P and the Dow both marginally fall to 2,080 and 17,764 respectively. The JOLTS (Job Openings and Labor Turnover) report today showed 5.376mm job openings against the estimated 5.038mm. This is the highest level of job openings since 2000 when this data began to be collected. The US ten year Treasury yield increased to 2.43% and the two year yield rose 3 basis points to 0.72%. EU officials quickly rejected the proposal set forward by Greece. The German yield increases 6 basis points to 0.95% and the euro falls 0.1% to $1.1278.

The selloff in emerging market debt continues as developed markets continue their economic recovery. Yields increasing in the US may very well mean better returns with less risk for some investors. As a result, monetary tightening could stop capital inflows to emerging markets by as much as 80% according to a study done by the World Bank. Debt issuance has increased in emerging markets, and many of these countries are reliant on international investors to buy their bonds. As a result the international community is an important source of financing for developing economies around the world, and the source may slow or stop in the coming months. Last month had a $4.4b outflow from emerging market bonds denominated in hard currency (typically USD). Growth is slowing and political risk is rising in many developing countries, signifying additional prospects that will contribute to decreasing investment. The dollar’s appreciation makes it more difficult for countries with weak currencies to pay back their debt, which increases the risk of holding emerging market bonds. This problem represents an important reason as to why the IMF is concerned about the effects of a rate hike in the US on the rest of the world.

Currency markets have been volatile, with sharp movements spilling over from bond markets. Making calls for FX strategists is becoming increasing difficult, with no clear trends developing. Earlier this year strategists expected dollar parity with the euro. Following this prediction the euro rebounded from around $1.05 to around $1.12. Similarly the Japanese yen was expected to reach Y125 around the end of the year, and it reached Y125 this past Friday.

Traders will pay attention to where Fed officials say interest rates will be at the end of this year when the Fed meets again next week. In March the Fed consensus was that interest rates would be 0.625% at the end of 2015, pricing in two rate hikes before year end. In contrast, the market for Fed funds futures implies just one interest rate increase in September. The Fed says the first increase will bring the fed funds rate between 0.25% and 0.5%. A survey for primary dealers says the first round of tightening will being the rate to 0.35%.

Tuesday June 9

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