Markets
Last week’s US early month eco data were supposed to give some guidance as to whether conditions are falling in place for the Fed to start talking about tapering asset purchases. However, strong ISM’s (including price rises) and ADP job growth but at the same time disappointing payrolls for the second consecutive month, have no compelling reason for a majority within the Fed to leave their wait-and-see modus. With a 559.000 net May US job growth (versus 675 000 expected), the scenario of a protracted recovery remains on track, but it remains far for the temporary labor market overheating/full employment the Fed is aiming for. A further decline of the unemployment rate from 6.1% to 5.8%, higher than expected wage growth, and growing evidence on labor shortages only complicated the picture on labor market tightness and its potential impact on price developments. Markets evidently reacted to payrolls miss rather than to the potential underlying narrative. The US curve bull flattened with yields declining between 1 bp (2-y) and 7.1 bp (10-y). The decline was almost solely driven by real yields. However, at 1.57%, the US 10-y yield is still holding within the established sideways range. Bunds underperformed the US-driven bond rally with yields easing between 0.3 bp (2-y) and 3.0bp (10-y). The dollar returned a substantial part of Thursday’s gain. Still, given the decline in real US yields, the damage could have been bigger. EUR/USD (close 1.2167) stays below the 1.22 handle. The DXY 90.00 barrier also survived. (US) equities enjoyed the idea that the Fed won’t be forced to pre-emptive action. The S&P (+0.88%) closed only a whisker away from the all-time top.
Today’s eco calendar is thin. Later this week, we keep an eye at the Germany ZEW confidence (Tuesday), US May CPI inflation, and the ECB policy decision(both Thursday). US headline inflation is expected to rise further to 4.7%. New ECB forecasts will provide the groundwork for the bank to adjust PEPP asset purchases. Despite recent soft ECB comments, the bank acknowledging economic progress probably still leaves room for a guarded slowdown in purchases. Friday’s decline brought the US 10-y lower in the sideways range but we expect the 1.53%/1.46% support/range bottom to hold. The German 10-y yield (-0.21%) is testing the -0.20% support, with the next reference at -0.25%, which we also expect to hold. Friday’s setback was a disappointment for the USD bulls. Even so, the US currency still as some spare room left compared to recent support levels at DXY 89.64 and EUR/USD 1.2243/66. Some euro caution might also prevail ahead of Thursday’s ECB meeting. Next EUR/USD support comes in at 1.2104 and 1.2052. EUR/GBPagain returned to the well-known territory near 0.86. A test of 0.8561 intermediate sterling resistance failed despite recent rather upbeat BoE comments (including BoE’s Cunliffe on Friday).
News Headlines
The German CDU won a resounding victory in the German State of Saxony-Anhalt. Ruling CDU Minister-President Haseloff won 37.1% of the vote (+7.4% compared with 2016) or 40 seats (+10) in the 97-parliament. The current ruling coalition with SDP (9 seats from 11) and Greens (7 seats from 5) could be extended if possible. The outcome of the election is a significant push in the back for the CDU and its national leader Laschet, who faced unusual internal competition from CSU leader Soder in the Chancellorship bid later this year. Two other conclusions are that the CDU managed to hold off the extreme right treat of the AfD (22 seats from 24) who fly high in the eastern German state and that the Greens’ performance is disappointed given their national election polling momentum.
Rating agency S&P raised the outlook of Australia’s top-notch AAA rating from negative to stable. S&P believes that the country’s efforts to contain the pandemic and limit long-term scarring resulted in a quicker and stronger economic recovery than earlier expected. The rating agency forecasts fiscal deficits to narrow toward 3% of GDP in the next two to three years after a 10% deficit in fiscal 2021. S&P also thinks that Australia’s external accounts will likely remain stronger than in the past. The Aussie dollar didn’t respond to the news. AUD/USD holds on to Friday’s gains induced by USD-weakness, trading near 0.7735.
