U.S. Nonfarm payrolls posted a strong 339k gain in May vs. a 195k estimate. April Nonfarm payrolls were revised higher to 294k (from 253k). Private payrolls were 283k (168k est.), and Manufacturing payrolls were -2k (5k est.). The unemployment rate for May increased to 3.7% from April’s 3.4%.

U.S. Treasury yields have surged in the wake of the employment data, the biggest gain of 0.08% in the 2-year tenor. Fed Fund Futures are pricing in a 0.42% probability of a 0.25% hike at the FOMC’s July policy meeting.

The USD has gained fractionally against the G10 currencies following the surprise employment data. Dollar gains are 0.38% vs. JPY, 0.24% vs. CHF, 0.17% vs. EUR, and 0.14% vs. GBP. Notable dollar losses today include a 0.48% decline vs. MXN and 0.72% drop against the AUD.

Equity markets remain buoyant following the Senate’s approval of the debt-ceiling measure, which is fueling today’s risk-on sentiment. All major equity indexes are trading higher along with other ‘risk’ assets such as the Mexican peso and Bitcoin.

USDMXN is quickly approaching this year’s low at 17.4010 (May 16^th) while trading below the 2017 low of 17.4395. Continued peso strength suggests a possible test of next major support at 17.1800.

The House passed the new debt-ceiling agreement in after-market hours yesterday. The legislation now goes to the Senate which must approve the government’s borrowing increase before June 5^th (estimate) to avoid default.

Fed officials tilted towards a pause in rate hikes at the June 14^th meeting in a series of coordinated comments yesterday. Speculation had been ramping up for a 25-basis point increase with the probability of a hike peaking at 69.6% at mid-day yesterday. But by market close the probability of a June increase had dropped to 31.7%.

Progress on the debt-limit and the Fed’s more dovish stance on rates is driving a risk-on move in markets today. U.S. Treasury yields are down in all tenors with the exception of the 1-year which is currently showing a small gain. The USD is lower vs. most G10 and major pairs, the biggest decline a 0.48% drop against the Mexican peso, consistent with increased risk appetite.

ADP Employment Change data released today was 278k, significantly above the 170k estimate. The ADP data is the precursor to tomorrow’s Change in Nonfarm Payrolls, the key reading on labor conditions in the U.S. The strong labor market is a key component of persistently high inflation, and is closely watched by the Fed in its ongoing rate policy.

The Fed’s favorite measure of inflation, Core PCE, was reported today at 5.0% for Q1, above the 4.9% estimate. This is most certainly unwelcome news for the Fed but can’t be much of a surprise given it lines up with the CPI data released on May 10^th which also showed no retreat in consumer inflation.

The probability of a rate hike at the FOMC’s July meeting crossed above 50% for the first time today in the current rate hike cycle following the release of Core PCE. Fed Funds Futures are also implying a 43% chance of a hike at the June policy meeting, but a June move has been essentially ruled out in recent comments by Fed officials. So, assuming a debt-ceiling agreement is reached soon, the Fed will likely keep rates unchanged at the June meeting and hike 25-basis points at the July meeting.

U.S. Treasury yields have rallied today, the biggest gain in the 1-year tenor, 0.079%, as treasury prices drop in anticipation of lending rates moving higher.

The U.S. dollar index is 0.26% with the dollar gaining in all G10 and major pairs. The dollar’s widest gains are 0.73%vs. SEK, 0.69% vs. NZD, 0.37% vs. NOK, 0.35% vs. AUD, and 0.28% vs. EUR.

The major equity indexes are a mix of gains and losses, but the Nasdaq 100 is the standout performer today with a gain of 2.31%, taking the lead from tech company Nvidia.

Markets are lower today as investors continue the shift to defensive positions. The impasse in the debt-ceiling negotiations becomes more critical by the day and traders are forced to adjust for the potential of a worst-case scenario.

Inflation numbers for the UK were released today, with April CPI reported higher than forecast in every category: monthly CPI was 1.2% vs. 0.7% forecast; and yearly CPI was 8.7% vs. the 8.2% estimate. Combined with hawkish comments from Fed officials this week, global markets are coming to the realization that rates are going to be higher for longer than previously thought.

European equity indexes are trading in negative territory and U.S. equities are set to open lower at the start of trading .

U.S. Treasury yields are split evenly between gains in the 1-month to 5-year tenors and declines in the 6-year to 30-year tenors. The probability of a 0.25% hike at the FOMC’s June and July meetings has increased and the likelihood of cuts at the remaining scheduled meetings through January has declined significantly.

The U.S. dollar index is -0.02% today, but that result masks some significant overnight USD gains and losses: 1.94% vs. NZD, 0.61% vs. AUD, and -1.13% vs. MXN.

The focus of today’s economic data is on the FOMC’s meeting minutes from the May 3^rd policy decision.

Hawkish comments from Fed officials yesterday came as a surprise to traders, who had filed away the 0.25% increase in the Fed’s policy (overnight) rate on May 3^rd as the ‘last hike’. Granted, consumer prices remain elevated. The small tick down in YoY CPI (4.9% vs. the previous 5.0%) reported on May 10^th was a disappointment to the Fed and was likely the impetus for new calls for higher rates from Fed policymakers. YoY CPI (year over year consumer price inflation) crossed above 4% in April of 2021 and has remained above since.

The Fed seems chronically in an unenviable position, being second-guessed for responding with rate adjustments that are criticized for being either too fast or too slow. Now add the debt-ceiling crisis to the mix, and the cross currents in forming Fed policy must be mind boggling. Higher borrowing rates translate directly into a higher debt service amount the U.S. government owes on its obligations, adding fuel to the current and future debt-ceiling crises. On the other hand, consumer inflation is becoming entrenched. Ask anyone reliant on a fixed source of income and they will tell you that whatever the recent inflation adjustments have been (if any), they have not been enough to keep up with prices.

The Fed’s Volker era of policy rate adjustments is looking increasingly brilliant in hindsight. A series of tactical outsized rate adjustments of several % shortly followed by equally sized rate cuts were effective at containing inflation.

The U.S. dollar index is 0.28% today and reached a 2-month high overnight at 103.65. Dollar gains vs. the G10 pairs: 0.45% vs. JPY, 0.22% vs. SEK, and 0.06% vs. GBP.

U.S. Treasury prices are down, lifting yields for the third consecutive day.

Equities are mixed with most major indexes trading in the red. Oil is higher by 1.04%. Gold is -0.15%.

Debt-ceiling negotiations remain on center stage for markets as traders take on more defensive positions against a U.S. debt default. Nobody knows exactly when the U.S. government will run out of money, but the consensus is early June. Treasury Secretary Janet Yellen has estimated that funds could be exhausted by June 1^st.

U.S. Treasury yields are higher in all tenors following hawkish comments by Fed officials early in the trading day. The Fed’s Kashkari said the probability of a June hike or cut is too close to call. And the Fed’s Bullard indicated two more 25 basis-point hikes will be needed in 2023, citing tight labor markets.

The U.S. dollar index is -0.03% today after trading in narrow overnight ranges. Dollar gains vs. the G10 are 0.36% vs. JPY, 0.22% vs. NOK, and 0.20% vs. AUD. The primary dollar decline is -0.22% vs. CHF.

Widening the view of the dollar’s performance against all major currencies, the biggest move is a 0.73% gain vs. MXN. The Mexican peso is under pressure on two fronts today: first is a shift to ‘risk off’ stemming from the debt-ceiling impasse, as traders exit the more volatile assets in exchange for the safety of the dollar; and second are the hawkish Fed comments which have lifted treasury yields and bringing the Fed’s overnight rate and Banxico’s overnight rate closer together (and reducing the expected payoff in the short USDMXN carry trade in the process).

In other markets, U.S. equities have opened trading higher by a slim margin, gold is -0.22%, and oil is -0.25%.

Banxico (Mexico’s central bank) left the overnight rate at 11.25% (as expected) in its policy announcement yesterday, the first pause in its tightening cycle since June of 2021 when the official rate was 4%. The bank’s policy statement indicated that inflation was beginning to ease but that the risk for inflation remained to the upside, and that the key rate is expected to remain at 11.25% ‘for an extended period of time’. The peso is 0.46% today vs. the dollar, its first gain after three consecutive daily declines. Near-term support is seen at 17.4000 and resistance at 17.9000.

The U.S. dollar is trading lower vs. all G10 and major currencies today. The biggest swings for the dollar are -1.0% vs. NZD, -0.93% vs. NOK, -0.66% vs. AUD, -0.48% vs. CHF, -0.46% vs. MXN, -0.45% vs. EUR, and -0.41% vs. GBP.

USDCNH is lower by 0.47% after China’s central bank vowed to curb speculation in the yuan. Offshore yuan (USDCNH) had been 0.36% after reaching 7.0752 overnight, its highest mark since December.

The major global equity indexes are universally higher today, and combined with the lower dollar can be read as increased risk appetite. Fed Chairman Powell is scheduled to speak today at 11:00am ET, and his comments will be watched for clues on the Fed’s next policy decision in June.

The dollar is trading higher on increased hope of a resolution to the debt ceiling negotiations. The U.S. Dollar Index gained 0.22% overnight, its 5^th daily gain in the last six trading days and is now at its highest level since March 27^th.

Today’s primary dollar gains: 0.61% vs. MXN, 0.42% vs. GBP, 0.40% vs. EUR, 0.38% vs. JPY, 0.36% vs. AUD, 0.34% vs. CHF, and 0.12% vs. CAD. USDJPY reached its highest point since December 2022 at 138.39.

U.S. Treasury yields are sharply higher today in all tenors, with the widest gain the 5-year of 0.063%. Lower probability of a U.S. debt default has increased risk appetite, prompting traders to exit traditional ‘safe’ assets in exchange for risk. Selling Treasury bills simultaneously drives down the price and lifts yield. Gold (another ‘safe’ asset) is lower by 0.63% today at $1,969.05/oz, its lowest price since April 3^rd.

Global equity indexes are mostly higher today, more evidence of the revived ‘risk-on’ enthusiasm in today’s markets.

Three Federal Reserve policymakers are scheduled to speak today (Jefferson, Barr, and Logan), and their comments will be closely watched for any hint of change to the Fed’s rate hike cycle. Fed Chairman Powell and former Fed Chairman Bernanke are scheduled to speak tomorrow.

Mexico’s central bank will announce its overnight rate policy today. No change expected to the current 11.25%. U.S. Weekly Jobless Claims for the week ending May 13^th were 242k, below the 251k estimate.

U.S. Treasury yields are lower in most tenors today with the biggest price increases in the 7yr – 20yr tenors -0.021%. A hint of positive news on the debt-ceiling impasse is pressuring yields following House Speaker Kevin McCarthy’s comment that a deal by the end of the week is feasible. Early this month four-week treasuries sold at a record 5.84% yield which was the highest yield for any Treasury bill since 2000.

Higher Treasury yields have enticed flows into long dollar positions. The U.S. dollar is higher today in 9/10 of the G10 pairs and most majors: 0.99% vs. NOK, 0.78% vs. SEK & MXN, 0.53% vs. JPY, 43% vs. CHF, 0.37% vs. EUR, and 0.27% vs. GBP.

The next FOMC meeting is less than a month away now (June 14^th) and Fed Funds Futures are implying only a 17% probability of a quarter-point hike. But that changes beginning with the FOMC’s July meeting as markets begin to price in a steadily increasing chance of rate cuts, with a high probability of 0.25% cuts in November, December, and January 2024.

U.S. equity futures are trading higher on increased hopes of a resolution in the debt-ceiling crisis.

Bitcoin and gold (both recently used to hedge against a U.S. government default) are lower today: BTC -1.06% and gold -0.23%.