Markets
The looming Fed meeting meant subdued trading on financial markets which even a much stronger than expected April ADP jobs report couldn’t change for the better. Job creation rose by 296k, almost double the 150k expected and a sharp increase from last month’s 142k. Leisure and hospitality lead the advance (+154k), followed by education and health services (+69k) and trade, transportation and utilities (+32k). The goods sector printed 50k+ jobs in natural resources and mining and in the construction sector. Manufacturing employment eased 38k. Pay growth continued its nearly year-long slowdown. ADP chief economist Richardson concludes that “employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.” US bond yields tried to leave the intraday lows further behind after the release but the move lacked strong legs. Current changes vary between -3.6 bps (5-y) and -2 bps (2-y). German Bunds underperform marginally, with yields flat at the front and losing 1.3 bps at the very long end. European data was confined to a lower than expected March unemployment rate. At 6.5%, the bloc even hit a new all-time low. European equities recouped up to 0.8% (EuroStoxx 50) of the losses incurred during yesterday’s risk-off but half of that evaporated in the meantime. US indices open with minor gains. Japan’s yen takes the lead on FX markets. USD/JPY falls from 136.55 to 135.42. EUR/JPY eases sub 150. The USD in general inches lower. EUR/USD rises towards 1.104 and the trade-weighted index slips to 101.59. Oil prices are under heavy selling pressure for a second day straight, pushing prices well below the level before OPEC+’s unexpected output cut end March. One barrel of Brent now sells for $73. The mid-March lowest close since end 2021 ($72.97) is under attack.
The services ISM (expected at 51.8, up from 51.2) is still due after wrapping up this report. It’s impact on market is bound to be limited with the upcoming Fed meeting. Chair Powell is expected to raise rates by 25 bps to 5-5.25%, in line with the March dot plot, before most likely announcing a pause in the tightening cycle. The statement in all likelihood will keep the door for further tightening open. Optionality and flexibility are key. In the current mindset however, we doubt the market will interpret today’s decision as anything other than a dovish hike that marks the end of and not a pause in this cycle. This may put downward pressure on yields, in particular at the front end of the curve. The (in our view misplaced) idea of rate cuts in the second half of this year may gain further traction. Currently some 60 bps of them are priced in by end 2023. The US 2-y yield camps south of the 4% barrier at the time of writing and it’s unlikely that it is going to recover that level post-Fed. 3.55% (March panic low) marks first support. In the 10y yield we’re looking at 3.24% (April YtD low). The US dollar faces additional losses. EUR/USD may test the current YtD intraday high of 1.1095. This level serves as an intermediate resistance level only, with the first, real reference located at 1.1274.
News & Views
The Hungarian parliament voted in favour of judiciary reforms including government limits to make appeals to the Constitutional Court, an automatic distribution of cases among judges and stronger remits for the council of judges to supervise the courts. The package of reforms are part of the so-called supermilestones imposed by the EU Commission to tackle long-standing concerns over rule of law and democratic standards. Others include lack of compliance when it comes to LGBTQ rights, academic freedom and asylum and concerns about corruption. EC Budget & Administration Commissioner Hahn last week said that approval could unlock about €13bn in cohesion funding (part of a €21.5bn package). The EC now needs to give its political blessing. The Hungarian forint loses some ground today in a likely buy-the-rumour, sell-the-fact move. EUR/HUF recently tested the YTD lows in the low 370-area and rebounds to 376.
French Finance Minister Le Maire today announced an extension of the three-month anti-inflation campaign – trimestre anti-inflation – which started early March and was due to end on June 15. Under the campaign, French retailers agreed to charge the lowest possible amount for some essential food items. Le Maire called on food manufacturers to help with lowering prices as wholesale prices are coming down. He guestimates that the trimestre anti-inflation so far led to a 5%-7% decline in affected items.
