In focus today
Today, focus is on the monetary policy meeting in the ECB. The ECB is widely expected to deliver a 25bp rate cut, largely because the Governing Council members have stated as much. The updated June staff projections are expected to suggest that the prevailing economic and monetary policy narrative stays broadly unchanged, and we expect the rate cut to be formulated as a rollback of the ‘insurance hike’ from September last year. We expect the ECB to repeat the meeting-by-meeting and data-dependent approach to the policy rate path beyond June, and we forecast the next cut only in December. For details, see ECB Preview: A political rate cut in June, and no cut in September, 24 May.
Also in Europe, the election for the European Parliament kicks off today in the Netherlands. Over the weekend the remaining member states will vote, and we will have a result of the election on Sunday evening.
In Denmark, we expect Nationalbanken to lower interest rates by 25bp as well, if ECB acts as we expect and lowers interest rates.
Overnight, China releases trade data for May. After a weak print in April, we look for a rebound in the annual growth rate as base effects turn more positive in May.
Economic and market news
What happened overnight
In Japan, Bank of Japan’s (BoJ) Nakamura said that based on current data it is appropriate for BoJ to maintain monetary policy intact for the time being. Further, he added that he sees a risk that if consumption weakens further it may discourage firms from raising prices, and that this could lead to inflation falling short of the 2% inflation target from 2025 and onwards.
What happened Wednesday
In the US, non-manufacturing ISM showed a very sharp uptick as it increased to 53.8 in May (cons: 50.8, prior: 49.4). Notably for monetary policy prices index declined further (58.1; from 59.2). Employment index rose slightly (47.1; from 45.9) but remains below the neutral level of 50. Both ISM and PMI pointed towards stronger services activity in May.
The Bank of Canada (BoC) lowered its interest rate by 25 bp to 4.75% at its monetary policy meeting. The move was in accordance with market’s pricing in an 84% probability of a rate cut at the meeting. Governor Macklem said that they have seen further and sustained evidence that underlying inflation is easing, and that monetary policy therefore no longer needs to be as restrictive. Furthermore, the BoC does not rule out that more rate cuts could be on the horizon if inflation continues to head in the right direction. Markets price in a 40% probability of a cut already at the next meeting in July. USD/CAD rose close to a full figure upon announcement. Since then, USD/CAD is back at the point from before the announcement.
The National Bank of Poland (NBP) kept interest rates unchanged at 5.75% at Wednesday’s monetary policy meeting, in line with market consensus. The inflation rate is back in the target range of 2.5% plus or minus one percentage point. However, there are some uncertainties on where inflation is headed since the polish government are planning to raise a cap on power prices in the second half of 2024, which according to the NBP could send inflation back above 5% at the end of the year.
In Japan, the nominal wage growth increased by 2.1% in April compared to same month a year ago. This means that in real terms Japanese wages fell 0.7% y/y, declining at a slower pace than in previous periods. We still want to see an effect of the solid spring wage hikes in the wage- and inflation data, which would allow the Bank of Japan to begin hiking rates further.
In China, the Caixin services PMI for May landed at 54.0 (cons: 52.6, prior: 52.5), much higher than expected. The number indicates that the Chinese service sector production is expanding at the highest pace in 10 months.
What happened Tuesday
In the US, President Biden announced tighter measures to curb illegal immigration on the US southern border. Officials from the Biden administration said that immigrants who illegally crossed the US-Mexican border would be ineligible for asylum until the number of daily encounters is below 1500. Currently it is above 2500 a day. Illegal immigration flow has already come down quite a bit from the peak seen in H2 2023. This seems consistent with the fact that the boom in foreign born labour force growth seen earlier has moderated a bit in March and April. We have previously flagged that this could be a factor to consider if we start to see weaker headline NFP growth towards the end of the year.
Speaking of the US labour market we saw another downside surprise in job openings with negative revisions (8.06M; prev. month revised to 8.36M from 8.49M). Weaker labour demand has been a decent leading indicator for cooling wages as well.
In Switzerland, May inflation came in at 1.4% y/y (cons: 1.4%, prior: 1.4%) and core inflation at 1.2% y/y (cons: 1.3%, prior: 1.2%). With April inflation at 1.37 and May inflation at 1.39, inflation is on track to meet the SNB’s Q2 inflation forecast of 1.4%. Importantly, the monthly momentum in both core and headline ticks lower to 0.1% m/m SA in headline and 0.1% in core. EUR/CHF slightly higher on the lower core measure and decreased monthly momentum.
Equities: Global equities were higher yesterday with several new all-time high closings and US indices ending at or near their daily highs. Benign macro data and five consecutive sessions of lower yields have fuelled risk appetite. Two interesting points from yesterday include a sizeable cyclical outperformance, which is logical given the data and the increase in risk appetite. Additionally, the tech sector rose 2.5% globally yesterday, with NVDA once again standing out. While this might raise curiosity and concern, it is a classic feature of late-cycle exuberance. Going against strong trends in the current environment can be extremely costly, and using a valuation approach is worthless as a timing tool. In the US yesterday, Dow +0.3%, S&P 500 +1.2%, Nasdaq +2.0%, Russell 2000 +1.5%. Asian markets are mostly higher this morning, and futures are higher in both Europe and the US as well.
FI: Yesterday, global bond yields declined as the sentiment regarding the Federal Reserve is changing slowly as market participants are changing their views on rate cuts from the Federal Reserve. 10Y US Treasury yields fells some 5-6bp yesterday, while 2Y US Treasury fell some 5bp. Furthermore, there was also a decent rally in the European government bonds with a broad-based decline in the yields.
FX: In a quiet session yesterday the most notable developments were the move higher in USD/JPY despite the rally in US Fixed income and the relatively modest move in CAD despite Bank of Canada’s first rate cut. Both EUR/SEK and EUR/NOK moved very little while EUR/USD edged marginally lower as we head into today’s ECB meeting, which we do not expect will rock the single currency.
