- European equity markets gain up to 0.5% today amid a nearly completely empty EMU eco calendar. US stock markets opened marginally stronger as well after an upbeat ADP report.
- ADP employment growth beat expectations in May, rising by 253k (vs 180k expected). Weekly jobless claims unexpectedly ticked up from 235k to 248k, but remain near historically low levels. The US manufacturing ISM nearly stabilised as expected at 54.9, but the "prices paid" component unexpectedly declined from68.5 to 60.
- Inflation in the US is likely to rise further following its recent pause given strong spending numbers and the tightening labour market, Washington-based Fed Governor Powell said as he advocated continued monetary policy tightening. He said the risks to the Fed’s outlook were as balanced as they have been in some time.
- UK manufacturing activity maintained its momentum in May and confidence rose as strong domestic demand buoyed orders. The PMI printed at 56.7 (vs. 56.5 consensus) in May after reaching 57.3 in April, which was the highest in 3 years. The final May EMU manufacturing PMI was confirmed at 57.0.
- Brussels and Italy have agreed on a rescue of the troubled Monte dei Paschi di Siena bank, outlining a draft plan that involves significant cost cuts, some investors taking a hit on bonds and top management accepting a cap on pay. The agreement is conditional on approval from the ECB.
Rates
US Treasuries lose ground after strong ADP report
Global core bond lost some ground today with US Treasuries underperforming following a strong ADP-report. Ahead of the release, bond trading was subdued and confined to tight ranges. Positive risk sentiment on European stock markets and lower oil price didn’t impact trading. At the time of writing, US yields shift 2.4 bps to 3.2 bps higher, the belly of the curve underperforming the wings. Changes on the German yield curve range between +1 bp and +1.8 bps. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Italy/Greece underperforming (+4 bps) and Portugal outperforming (-5 bps).
ADP reported net job growth of 253k in May from 174k in April and against 180k consensus. It bodes well for tomorrow’s payrolls. Weekly jobless claims unexpectedly ticked up, but remain below 250k en near historically low levels. The US manufacturing stabilised as expected at 54.9, but the prices paid component of the report disappointed. Washington-based Fed governor Powell, usually sparse with comments, sounded upbeat on the economy. He predicts a further rise in inflation after the current pause given strong spending and a tightening labour market. According to Powell, the Fed is as close to its assigned goals as it has been for many years. That warrants a continuation of the tightening cycle (in June?!) and the start of the balance sheet run-off later this year.
The French debt agency sold three OAT’s for a combined €8.27B, near the upper end of the targeted €7.5-8.5B: €5.08B 1% May2027, €1.72B 5.75% Oct2032 and €1.47B 1.75% Jun2039. The auction bid cover was 1.8, which is rather low for French norms. Apparently some investors take a cautious approach ahead of the parliamentary elections. The Spanish Tesoro launched a new 3-yr Bono (€2.7B 0.05% Jan2021) and tapped the 50-yr Obligacion (€1.44B 3.45% Jul2066). The total amount sold (€4.14B) was in the upper bound of the eyed €3.5-4.5B. The auction bid cover was 1.72 with main interest to the Jan2021 Bono.
Currencies
USD decline halts ahead of key US eco data
The dollar started the session close to the recent lows against the euro and the dollar. The EMU data were OK, but not strong enough to push EUR/USD to a new short-term correction top. Interest rate differentials between the dollar and the euro didn’t narrow anymore and the dollar profited slightly from strong ADP private job growth. EUR/USD dropped to the low 1.12 area. USD/JPY tries to make further headway north of 111, awaiting tomorrow’s payrolls.
Overnight, country specific issues dominated trading in Asia. Positive capital spending data and corporate profits supported Japanese equities. The yen stayed strong despite positive risk sentiment. USD/JPY hovered in the 111 area. The moves in euro were limited, but EUR/USD maintained yesterday’s gains and hovered within reach of the 1.1268 resistance.
European markets opened with a cautious risk-on bias as equities copied the late session rebound in the US yesterday. The May EMU manufacturing PMI was confirmed at 57.00. Italian growth was also revised higher from 0.2% Q/Q to 0.4% Q/Q. However, it wasn’t enough to inspire further EUR/USD gains beyond the 1.1268 resistance. Moves on the bond markets were limited. If anything, interest rate differentials didn’t narrow further in favour of the euro. EUR/USD gradually lost a few ticks during the morning session and settled in the mid 1.12 area. The dollar regained a few ticks against the yen and tried to recapture the 111 big figure.
Early in US dealings, the ADP labour market report printed at 253 000 additional jobs in the US private sector while 180 000 was expected. The dollar gained some further ground, but investors remain cautious to position for a protracted USD uptrend just hours before the US manufacturing ISM and ahead of tomorrow’s key Payrolls report. The latter will probably decide whether there is room for a sustained USD rebound. EUR/USD is changings hands in the low 1.12 area going in the publication of the US ISM. USD/JPY rebounded to the 111.35/40 area. The US manufacturing ISM was very close to expectations. A soft prices paid sub-index might be marginally USD negative.
Sterling continues trading nervously on political jitters
The UK elections remain the key driver for sterling trading. The UK manufacturing PMI declined less than expected from 57.00 to 56.7, indicating ongoing good growth in the sector. However the impact on sterling trading was negligible. In technical trade, EUR/GBP even touched a minor short-term top in the 0.8755 area, but no clear break occurred. Most election polls still indicated a lead for PM May’s conservative party, but the lead is declining. After the recent substantial sterling losses, some consolidation seems to kick in. EUR/GBP hovers in the lower half of the 0.87 big figure. Cable is changing hands in the mid 1.28 area as the countdown to June 08 continues.
