The commodity sector slumped on Thursday after the Fed Chairman Ben Bernanke downplayed the possibility of further easing at the testimony before the Congress. The front-month contract for WTI crude oil initially soared to a 5-day high of 57.03 before reversing and ending the day at 84.82 while the equivalent Brent crude contract also erased early gains and settled at 99.93, losing -0.71%. Gold tumbled, breaking below 1600 again and closed at 1588.0, down -2.83%. The stock market was, however, boosted by China's unexpected rate cuts by -25 bps on both lending and deposit rates. The situation in the Eurozone remained worrisome. Fitch downgraded the credit rating of Spain by 3 notches to BBB. The rating agency cited that the negative outlook primarily reflects the risks associated with a further worsening of the Eurozone crisis, notably contagion from the ongoing Greek crisis.
At the testimony, Fed Chairman Bernanke stated that the situation in Europe poses significant risks to the US financial system and economy and must be monitored closely. He also indicated that the Federal Reserve remains prepared to take action as needed to protect the US financial system and economy due to the risks posed by the situation in Europe. Regarding further easing by the Fed to boost the US growth, the Chairman stressed the Committee has a number of options to consider and if it's decided that further action is required, the Committee would also decide what action is appropriate or what communications are appropriate. Yet, he did not indicate what options are being considered.
The People's Bank of China (PBOC) lowered the 1-year lending and deposit rates by -25 bps, effective June 8. While it appeared that the reduction sizes were the same for both lending and deposit rates, the actual changes were 'asymmetric'. The headline 1-year lending rate is lowered by -25 bps to 6.31%. Meanwhile, the central bank relaxed the floor of the lending rate to 80% of the benchmark rate from 90% previously, meaning the actual lending rate can be reduced to as low as 5.048% from 5.904% (down -85.6 bps). The 1-year deposit rate was also lowered by -25 bps to 3.25%. As the PBOC also relaxed the ceiling of the deposit rate to 110% of the benchmark rate from 100% previously, the actual deposit rate can be raised to 3.575% from 3.5% (up +7.5 bps). Most banks are expected to offer the maximum deposit due to the fight for deposits among themselves. Increase in the ceiling of the deposit rate can also help mitigate the inflation risk brought about the rate cut. The move is generally a positive to the market and marks a small step to interest rate liberalization in China.
On the dataflow, the US initial jobless claims fell -12K to 377K in the week ended June 2. Although the reading came in weaker than expectations, the upward revision in the previous week's data sent the 4-week moving average +2K higher to 378K during the week. The US trade deficits probably narrowed to US$ 48.5B in April from US$ 51.8B in the prior month.