Markets
The Fed last week suggested a pause in its anti-inflation campaign while the ECB shifted to a slower pace of tightening. Both central banks want time to assess the impact of previous policy action and of recent tightening of financial conditions. Still, especially the ECB clearly indicated that there is further work to do. Friday’s US payrolls were a first economic reality check on how the Fed policy is affecting demand for and the price of labour. Admittedly, the labor data are a lagging indicator. Still the report show ongoing strong demand. The US economy in April added an above-consensus 253k jobs. The unemployment rate dropped from 3.5% to 3.4% while average hourly earnings accelerated to 0.5% M/M and 4.4% Y/Y (4.2% expected). At the same time, pressure on regional US banks stocks also eased Friday, triggering a relief rally in US equities (Nasdaq +2.25%). This combination caused US yields to rebound between 12.4 bps (2-y) and 2.4 bps (30-y). It allowed them to take some distance from key support levels (3.60% area for the 2-y, 3.25% are for the 10-y). Yields are evolving in the lower part of recent consolidation pattern. Expectations for a first Fed rate cut are pushed back in time, but markets still see a first 25 bps step in September. German yields also rebounded 9.0/11.0 bps across the curve as first ECB speakers post Thursday’s policy decision echoed chair Lagarde’s guidance that the ECB still as further to go. On FX markets, post-payrolls USD gains were very short-lived. DXY even closed marginally lower near 101.20. EUR/USD finished well north of 1.10 (1.102). With little hard eco news, sterling for the second consecutive day outperformed. EUR/GBP closed at 0.8725, nearing the 0.8719/0.8691 support area.
Asian markets mostly join Friday’s risk-rally on WS. The dollar again losing a few ticks. US Treasuries are trading little changed. Today (and tomorrow) there are few important eco data in the US or Europe. On Wednesday, US April CPI will be one of the key data for this week. Whatever the outcome, it will take a long series of relatively strong data for markets to backtrack on the idea of Fed rate cuts after summer. In the meantime, market sentiment depends on headlines on financial stability or the debate on the US debt ceiling. In this respect, we keep an eye at the Fed Senior Loan Officer Opinion Survey and the May Financial stability report today. We expect US yields to hold a sideways trading pattern slightly above the above-mentioned key support levels. The technical picture for the dollar remains fragile with the DXY 100.8 support and EUR/USD 1.1095 resistance still within reach.
News and views
Slovak caretaker prime minister Heger offered his resignation on Sunday. The trigger for his decision were a series of other resignations recently. The agriculture minister left for being involved in a subsidy scandal. The foreign minister stepped down a day later without explanation. President Caputová said she’ll appoint a non-partisan cabinet next week with central bank deputy governor Odor leading the technocratic government going into snap elections September 30. Heger assumed the role of a caretaker PM on the president’s request after his government lost its parliamentary majority in September 2022, followed by Heger losing a vote of no confidence in December. The deepening political crisis could set the stage for an early comeback of Fico. The former PM and his Smer party saw their downfall in 2018 amid nationwide anti-corruption protests. But widespread resentment about high inflation, which Smer blames mostly on sanctions against Russia, lifted them back in the saddle. They now lead in the polls.
Rating agency Fitch maintained Switzerland’s top AAA rating with a stable outlook. According to Fitch, the country has strong credit fundamentals with income and governance indicators above the median level of its rated peers, adding that “A record of prudent economic and fiscal policymaking lends support to macroeconomic stability and low government debt levels” (27.6% end 2022). Fitch said that the large banking sector (assets 5x GDP) is a long-standing contingent liability and challenges to the sector have increased. Yet, the stable outlook reflects the view of a limited risk of sector-wide spillovers from the UBS-CS takeover with no material deterioration in the sovereign’s balance sheet. Fitch expects the Swiss economy to expand 0.8% this year with tighter monetary policy (peak seen at 1.75%) and weaker external demand to keep the outlook subdued. Inflation would average 3% in 2023 and 2.2% in 2024 with risks tilted to the upside.
