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US Stocks Cautiously Await ECB Meeting on Thursday


Today's financial recap and tomorrow's financial outlook.

Three events overnight set the stage for risk assets globally. The Chinese non-manufacturing PMI report was better than expected and echoed similar strength from recent manufacturing surveys. Eurozone inflation fell to 0.5% year-on-year in May, echoing similar weakness seen in the German figures yesterday. (That is down from 0.7% in April and below the 0.6% expected.) Lastly, the Reserve Bank of Australia kept policy unchanged and sent a slightly more hawkish signal regarding the recent increase in the Australian dollar.

US equities continued to move very little as investors wait to change positioning after the results of the ECB meeting this coming Thursday. Early weakness that coincided with the weaker European inflation results didn't last, and the benchmark S&P 500 Index (INDEXSP:.INX) meandered back to flat. Energy stocks continued to perform well as did life insurers. The latter stands to benefit from the recent increase in yields. Small-cap stocks continued to underperform large caps.

US Treasuries continued to sell off today. The 10-year yield has increased by 18 basis points since its low point last Thursday afternoon. A speech by Kansas City Fed President Esther George, who is hawkish, indicated that the Fed should begin raising its policy rate before late 2016, and when it does, it will do so at a gradual rate. This elicited a further sell off in long-duration Treasuries as some investors misinterpreted the news headlines. By all accounts, however, the 10-year Treasury has reached a level of short-term exhaustion.

A news report from Bloomberg today which cited two ECB officials suggested that the central bank will announce deposit and policy rate cuts of between 10 and 15 basis points, and leave the door open for further cuts in the future. Additionally, the bank will announce a Funding for Lending facility -- which will allow commercial banks to obtain funding for up to 5% of their existing loans -- to help extend credit to small and medium businesses. The bank will also significantly lower its 2014 inflation outlook but will keep the rest of its economic projections broadly unchanged.

Tomorrow's Financial Outlook

The most important event for risk assets tomorrow is the results of the May ADP private payrolls report. Economic activity for the month have been very robust, and weather has been much milder, signaling that there could have been a significant pickup in hiring. The US April trade balance and May ISM services index are also scheduled to be reported. The employment component from the ISM report has a high correlation with the government payrolls report, which is scheduled to be released on Friday morning.

Two GDP reports, from Australia and the eurozone, are due out overnight. The RBA had a much more upbeat tone on economic activity than it did in it's previous statement. Investors will be looking for that positivity to be corroborated by the GDP report. The eurozone report is important, but less so with the near-certainty of ECB action on Thursday and the fact that it is from the first quarter when we're already in June (and approaching the third quarter).

The only notable earnings report scheduled for tomorrow will come from PVH Corp (NYSE:PVH).

Twitter: @Minyanville

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No positions in stocks mentioned.

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