Markets
The US market needle again points in the direction of a December rather than a September (50% probability from 85%) Fed policy rate cut after Friday’s consensus-beating payrolls. 272k net job growth and accelerating wage growth (0.4% M/M & 4.1% Y/Y) triggered a massive sell-off in US Treasuries. Daily changes on the US yield curve ranged between +12 bps (30-yr) and +16 bps (2-yr). The US 10-yr yield that way managed to get away from the 4.3% support area. We don’t expect another US Treasury rebound in the run-up to Wednesday’s May CPI inflation figures and Fed meeting. The consensus bar for headline inflation (0.1% M/M) seems rather low suggesting upside risks for Y/Y inflation (3.4%) also given last year’s equally low comparison base (0.1%). The pace of core inflation is expected stable compared to April (0.3% M/M) with base effects (0.4% last year) more in favour of a disinflation narrative (3.5% Y/Y expected). The Fed will keep policy rates unchanged but both the statement and the updated summary of economic projections risk showing a further hawkish shift. The updated dot plot will be a very close between a more market-friendly consensus of two rate cuts this year and sell-off triggering one rate cut. The path for 2025 risks being slower as well (current end of year median of 3.75%-4%) The neutral rate is equally vulnerable to a new upward (median) revision from 2.56% in March (2.5% in December). US yields can revisit this year’s highs is this scenario materializes.
The dollar rallied following US payrolls to a weekly close of EUR/USD 1.08 and ending the topside test of the 1.09 sideways range. The pair this morning sinks to the 1.0750 area after French president Macron conceded defeat in EU elections by calling snap elections at the end of this month. This election risk (strong showing of far right RN) is likely to keep the euro under pressure in the build-up. We expect to see some widening in sovereign spreads as well this week. EUR/GBP fell below the 0.85 support zone to currently change hands around 0.8450. Those are the weakest levels since August 2022. If the Bank of England turns out more hawkish than the ECB next this week, it could add to EUR/GBP selling pressure.
News & Views
French President Macron will dissolve parliament after Marine Le Pen’s Rassemblement National secured almost 1/3rd of the votes in EU elections compared to less than 15% for Macron’s centrist alliance. Snap elections will be held on June 30 and July 07. Macron sees a need for clarification and a clear majority to act in serenity and harmony. The overall outcome of European elections showed a strong outcome for the center-right EPP, securing 184 seats in the 720 seat EU parliament. Current coalition partners Socialists and Democrats and the pro-European Renew managed 139 and 80 seats respectively. Together, they again have a majority but it’s unsure whether this will be enough for outgoing President of the EC (von der Leyen) to secure a second term as several members of parliament of the three groups might not support her candidacy. The EC President also needs a qualified majority of 15 of the 27 EU leaders of countries that together represent 65% of the EU population. The far-right and Euro-sceptic group Identity and Democracy raised its number of seats from 49 to 58 with the German AfD gaining another 15 seats.
At the same time of the elections for the EU parliament, Belgium held elections for the national and its regional parliaments. On a federal level (150 seats), the center-right Flemish NVA secured 24 seats (-1) and remains the biggest party, staying ahead of the far-right Vlaams Belang (20 seats; +2). Among the families that are represented with parties in both the French and Flemish speaking part of the country, the liberal family obtained 27 seats (thanks to a strong showing of MR (20 seats) in Wallonia; +1 combined), the social democrats won 29 seats (stable) and Christian democrats 25 seats (+8). The Green group is decimated from a combined 21 seats to only 9 while the far-left group PTB-PVBA collected 15 seats (+3). Even as political fragmentation might complicate the formation of a new government, the leader of the NVA party is expected to take the lead to form a new center-right government.
Graphs
GE 10y yield
The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. The German 10y yield set a new YtD top at 2.7%.
US 10y yield
The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed Chair Powell indicated that further tightening was unlikely. However, the FOMC Minutes still showed internal debate on whether policy is restrictive enough. Sticky inflation suggests any rate cut will be a tough balancing act while several policy makers hint at a higher neutral rate. The US 10-y yield is stuck in the 4.3/4.7% trading range.
EUR/USD
EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09 resistance. Focus turns to the US side of the story with May CPI inflation numbers and a more hawkish Fed looming on the horizon.
EUR/GBP
Debate at the Bank of England is focused at the timing of rate cuts. Slower than expected April disinflation and a surprise general election on July 4 suggest that a June cut in line with the ECB looks improbable. Sterling gained momentum with money markets now discounting a Fed-like scenario. EUR/GBP tested the 2023 & 2024 lows near 0.85. Euro weakness eventually pulled the trick after French president Macron called snap elections following a weak showing in EU elections.
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