In focus today
Today, in the euro area, we receive the Sentix investor confidence indicator which will give us the first estimate of sentiment in June.
We expect little to no market reaction to the European Parliament elections this past weekend, despite its status as a significant political event. Historical data suggests that these elections typically have a minimal effect on markets, and we anticipate a similar scenario this time. For more details, see European Parliament election will not move markets, 14 May 2024
In the coming week, particular focus is on the US May CPI print and subsequent FOMC rate decision on Wednesday, where we expect the Fed to maintain the current level. On Friday, we will get a rate decision from the BoJ. While we expect no change in the policy rate, we do expect it to signal tapering of its bond purchases which have so far remained unchanged at JPY 6tn. a month.
Economic and market news
What happened over the weekend
In France, President Emmanuel Macron has called a snap domestic parliament vote with the first round set for June 30 and the second for July 7. This follows a disappointing result for his party in the European parliamentary elections, where Marine Le Pen’s National Rally (RN) party won 32% of the votes against the 15% of Macron’s Renaissance party. The RN would gain the power to control domestic policy if they win a majority in the upcoming domestic elections, while Macron would still direct foreign policy.
What happened Friday
In the US, May labour market data was profoundly hawkish, showing a labour market that is still tight – the opposite of what the Fed wants to see. Nonfarm payrolls increased 272k (cons.: +190k), average hourly earnings rose 0.4% m/m (prev.: 0.2%), and data showed that the labour force declined by 250k persons. The greenback gained (DXY +0.76%) and treasury yields rose (10Y +15bps) as markets returned to pricing in just a single December cut.
Euro area wage growth picked up by some 10-20bps in y/y terms in Q1 which was slightly to the high side compared to what the ECB expected. However, the current figures reflect in part a catch-up of previously lost purchasing power from wage agreements that are infrequently negotiated, and the forward-looking indicators show wage pressures that are elevated but also declining. Final GDP for Q1 gave the same signal as its 0.3% q/q growth was almost entirely driven by net exports while domestic pressure remained muted.
Market movements
Equities: Global equities ended lower on Friday, yet still higher for the week. The ECB meeting and the NFP data were the two major takeaways from last week, both supporting the prolonged bullish narrative in our opinion. Despite a significant increase in yields on Friday, it was intriguing to see the relative resistance in equities. Small cap stocks, which lost almost 3% against large-cap last week, suffered the most from this extended bullishness and yield lift. REITs were heavily sold off on Friday due to rising yields and stories about a challenging refinancing environment related to CRE. Cyclical growth, quality, and momentum led the rally once again.””Higher for longe”” for the right reason took VIX down to the low 12s, with the risk of breaking below this level if Wednesday’s US CPI report and FOMC is benign. In the US on Friday, Dow fell by 0.2%, S&P 500 by 0.1%, Nasdaq by 0.2%, and Russell 2000 by 1.1%.
FI: The strong US labour market report sent yields sharply higher on Friday, particular led by the belly of the curve. The 272k new jobs was almost 100k better than consensus expectations. The 10y Bunds ended 7bp higher on the day at 2.62%. The knee-jerk reaction from the US, spilled over to the EUR, where markets at one point priced less than 31bp of additional cuts from the ECB by year end, albeit some of it was reversed. The ECB GC member” comment on Friday was mainly cautioning against assuming a particular move on further rate cuts.
FX: USD rallied on Friday on the back of the stronger than expected US jobs report, while Scandies were among the biggest losers in G10. EUR/USD fell to 1.08, EUR/SEK jumped close to 11.40 and EUR/NOK rose towards 11.60.
, average hourly earnings rose 0.4% m/m (prev.: 0.2%), and data showed that the labour force declined by 250k persons. The greenback gained (DXY +0.76%) and treasury yields rose (10Y +15bps) as markets returned to pricing in just a single December cut.){kind=link}