Markets
Today’s main data/events with market moving potential still have to be published after finishing this report with the US manufacturing ISM and, to a lesser extent, the Fed Beige Book, bringing a first input for the June 14-15 Fed policy meeting. Still, European investors preferred to err to the side of caution. The astonishing spike in May EMU inflation (8.1%) as published yesterday continues fueling the debate whether the ECB has the room to continue on the path of gradualism as advocated by chair Lagarde and ECB chief economist Lane (who is scheduled to speak this evening). In an e-mail comment to Bloomberg, ECB arch Hawk Holzmann, evidently ‘was obliged’ to use yesterday’s data to highlight the case for a 50 bps lift-off at the July meeting. He considers this a necessary signal that the ECB is serious about fighting inflation and it could support the weak euro exchange rate, which is not helpful to tame inflation. At the same time, a big miss in April German retail sales (-5.4% M/M), admittedly a very volatile series, was a hard reminder that tightening will have to take place in an environment of decelerating growth and fragile confidence. European equities initially struggled to avoid further losses after yesterday’s setback, but sentiment improved in the run-up to US trading. The EuroStoxx50 is gaining about 0.4%. US equities are outperforming, opening with gains of up to 1.1% (Nasdaq). Both US and European interest rate markets stay focused on inflation rather than on growth. German yields are trending further north even after sharp increases yesterday and Monday, gaining between 1 bp (5-y) and 4 bps (30-y). The German 30-y yield continues setting new cycle highs north of 1.40%. At the short end of European curves, the 2-y swap is extensively testing the early May top (1.10% area). US yields show a similar picture with the 2-y yield gaining 3 bps while the 30-y is trading little changed.
The relative calm on interest rate markets is causing directionless trading in the major FX cross rates. The DXY USD trades little changed near 101.90. Similar consolidation is visible in the EUR/USD cross rate (marginally lower at 1.072). Recent rise in US and European yields after a temporary rebound again puts the yen in the defensive (USD/JPY 129.34 and EUR/JPY 138.72). Sterling underperforms the euro (EUR/GBP 0.8540) and the dollar (cable 1.2565) as UK markets are preparing for a long weekend. News Headlines
The euro area unemployment rate stabilized at 6.8% in April, matching the lowest level on record. The unemployment rate for men decreased from 6.5% to 6.4% with the metric for woman stable at 7.2%. Youth employment (under 25) declined from 14% to 13.9%. On a national level, Germany has the lowest tally in EMU with 3%. Outside the currency union, Czech Republic has an even tighter labour market with an unemployment rate of 2.4%. Spain is at the opposite end with 13.3%. The Belgian unemployment rate ticked up from 5.6% to 5.7%. The Federal Reserve will this month start its quantitative tightening process. They aim to shrink the elevated balance sheet ($8.9tn) to more “normal” levels. In practice, they’ll stop reinvesting proceeds of maturing bonds from their QE portfolios. From June until September, they’ll cap the monthly run-off at $47.5bn, consisting of $30tn US Treasuries and $17.5bn mortgage-backed securities. Afterwards, the caps will double to a combined amount of $95bn/month. That compares with a $50bn peak pace in the 2017-2019 period when the Fed shrank its balance sheet slowly from around $4.5tn to about $3.8tn. The Fed has a total amount of $48.5bn Treasury redemptions this month, starting June 15, implying $30tn run-off and $18.5bn reinvestments.
