Markets
With only the US services ISM as a really market relevant data series to be published after finishing this report, markets today mainly build the Friday’s post-payrolls narrative. Yields in the US, in Europe, but also in the UK are rebounding further. Ongoing labour market strength suggests that it’s premature to position for a (demand-driven) recession. To put it otherwise, (consumer) demand might stay stronger for longer than what is necessary for (core) inflation to quickly return to the central banks’ targets. Follow-though price action on Friday’s jump lifts US rates about 7.0/3.5 bps with the curve inverting further. The end of May peak yields (4.64% for the US 2-y vs 4.55% currently, 3,86% for the US 10-y yield vs 3.74% now) are again on the radar. Still a break won’t be that easy as the Fed’s ‘skip’ of a June rate hike still leaves plenty of eco data to finetune both the markets’ and the Fed’s assessment on what to do in July. European/German markets underperform. In a hearing before the EU Parliament, ECB Chair Lagarde reiterates that there is no clear evidence that underlying inflation has peaked, even as the effects of ECB policy start to materialize. German yields are gaining between 8 bps (2-y) and 6 bps (10-y). Similar narrative for UK markets (+8 bps 2-y, + 4bps 30-y). If the Saudi oil production cut would succeed to put the oil price again on an upward trajectory, over time it might also slow the decline of headline inflation. Admittedly, the jury is still out whether the trick will work this time. At $78 p/b, brent moves away from the low $70 p/b area. In this respect, also keep an eye at the rebound in the European reference Dutch natural Gas contract, jumping more than 15% from Friday’s cycle low. US and European equities are trading little changed (EuroStoxx -0.10%, S&P + 0.2%). After Friday’s substantial gains, this still might be labelled as ‘constructive’ price action.
On FX markets, the dollar outperforms most other majors. DXY trades near 104.3 (from 104.04) with last week’s correction top at about 104.7. EUR/USD is drifting below the 1.07 big figure (1.0685) with the correction low at 1.0635. USD/JPY regains the 140 barrier (140.25). For now, oil/commodity related currencies hardly profit from the Saudi oil production cut. USD/CAD trades marginally lower near 1.3435. EUR/NOK rises marginally to 11.82. The Aussie dollar (AUD/USD 0.6605) trades little changed as investors look out for tomorrow’s RBA policy decision. The Swedish krone (EUR/SEK 10.65) struggles to avoid returning to recent lows as markets continue to ponder the impact of real estate stress on Riksbank policy. Sterling is falling prey to profit taking with EUR/GBP returning to the 0.863 area. CE currencies remain in excellent shape (EUR/CZK 23,55, EURHUF 369,2). The zloty is even touched the strongest against the euro since June 2021.
News & Views
Turkish headline CPI in May fell from 43.68% to 39.59%, a little above the 39.2% consensus estimate. Inflation nearly flatlined M/M (0.04%), a direct consequence from president Erdogan offering natural gas to households for free last month in the run-up to the elections. The component ‘housing, water, electricity, gas and other fuels” dropped a whopping 13.79% m/m. Core inflation for the second months straight topped headline inflation and even reaccelerated from 45.48% to 46.62%,(43.70% expected). The data remain extremely troubling for a country reeling from a currency crisis amid very easy CB policy. President Erdogan appointed Mehmet Simsek as the new Treasury and Finance minister. In his first remarks, he signaled a return to conventional policies but market doubts remain. The Turkish Lira opened at a record low and extended losses after the data. USD/TRY trades near 21.24.
Czech wages grew by 8.6% y/y in the first quarter of this year. That’s an acceleration from a downwardly revised 6.6% in the final quarter of last year. It is, however, slower than the 9.1% the Czech central bank forecasted. In addition, real wages fell by -6.7%, a little over the -6% consensus estimate. The numbers serve as critical input to the CNB meeting June 21 and could ease hawkish policy makers’ concerns about the emergence of a wage-price spiral somewhat. The previous gathering was a close 4-3 call between the status quo (7%) and a rate hike. In combination with the Czech government’s determination to get the budget under control and disappointing growth details last week, it may settle the debate. Instead, the CNB could opt for keeping the policy rate at 7% for longer. One wildcard still remaining in the run-up to the meeting are Czech CPI numbers, due June 12. The Czech crown erased kneejerk losses shortly after today’s publication. EUR/CZK is trading around 23.54.
