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Over the past two weeks, the S&P 500 has traded in a tight 1.65% range, with short-term realized volatility dropping to single digits and VIX trading at post-Covid lows. Moreover, even with the ECB and US CPI later this week, SPX at-the-money straddles are only pricing 80bp through Friday's close. Thus, the equity market expects very little volatility in the near term. 

Currency markets appear to be stuck in a summer rut, with the street looking for direction via the June 16 FOMC meeting. However, moving into significant economic calendar events, there is generally pressure on existing positions to reduce. So, I think this will be the case for FOMC as the market has built up a significant short USD position over the last few months. So, keep that in mind if you're short-running dollars. 

USD/CNH dropped almost 100 pips in pre-market this morning on the news about US/China trade talks appeared to be the trigger; I think USD/CNH selling flows since Wednesday in the market may be the proper driver as the spot was hefty and CNH strengthened further against the basket. The following supports are at 6.3750 and 6.3525, while resistance lies at 6.3950 and 6.4100. Still, the PBoC pushback on CNH makes it harder for the USD to sell off aggressively.

I don't think a significant turn in USD/CNH is being orchestrated, but the move on the FX reserve ratio is worth factoring into the USD view.

There have been a few rounds of Sino-US communications since last week with more senior officials involved. Onshore media has been painting a more pleasant picture. Still, with the Biden administration's unchanged, if not more hostile, stance towards China and frequent interactions between the US and Taiwan recently, it is hard to draw a simple conclusion.

The 'sticker shock' of near-5% US CPI inflation and more hawkish-than-expected ECB messaging would point to near-term downside risks to global equity markets, a reversal in this week's fixed income rally. 

After an exceptionally high PPI inflation in China, at 9.0%, would imply less accommodative central bank policy in the context of building global inflationary pressures. But beyond the concise term, US CPI inflation will be deemed transitory absent a hard-hawkish pivot from the Fed, suggesting that any USD rally proves temporary, while EUR/USD upside proves more durable.

As for the FEDS, though the May employment report missed expectations, the 559k gain in headline nonfarm payrolls (496k private) which Cleveland Fed President Mester characterized as "solid" but still short of "substantial further progress." She also noted that the data are "not anywhere near a wage-price spiral." While there was some evidence in the report that labor shortages result in upward pressure on wages, high demand in the leisure & hospitality sector is the most obvious.

Brainard sounds less patient in recent speeches, so significant change in the FED doves’ words/actions should put the market on high alert for potential taper talk at the June 16 Fed meeting.