In focus today
In the US, NFIB’s small business optimism index is due for release for May. General sentiment has remained weak over the past few months, and also firms’ price plans took a turn lower in the April survey.
In the UK, focus turns to the release of the official UK labour market report. With the sharp increase in national living and minimum wage age this will likely underpin wage pressures with wage growth excl. bonus expected to tick up to 6.1% 3m y/y.
Overnight we get Chinese CPI and PPI for May. Consensus is for a rise in CPI from 0.3% y/y to 0.4% y/y, which seems fair. It should not move markets. PPI is set to rise to -1.5% y/y up from -2.5% y/y. Higher metal prices lately is the main culprit for the expectations of easing producer price deflation.
Economic and market news
What happened yesterday
In France, markets reacted to the news about Emmanuel Macron calling for snap parliamentary election on Sunday. If the election results are similar to those of Sunday’s European Parliament election, Macron will no longer able to push reforms like indexation of the retirement age, the uncertainty around French public finances has increased. The yield on the 10Y French government bonds widened 8bp vs. 10y German Bunds, to the widest level this year at 55bp. EUR/USD dropped to 1.0733 at some point yesterday the lowest rate since 9 May.
In the euro area, ECB president Lagarde said that ECB interest rates are not on a linear downward path, and that policymakers could at times wait more than one meeting before lowering rates again. We expect ECB to cut interest rates once more in 2024 at the December meeting. Markets are currently pricing 31bp of cuts by year end.
Further in the euro area the Sentix index came in at 0.3 (cons: -1.8, prior: -3.6), which was higher than expected. It was driven by improved future expectations. However, the assessment of the current situation is still weak, especially for the German economy.
Market movements
Equities: Global equities ascended yesterday, with US indices finishing near the day’s peak, while European indices lagged due to the EP election results indicating a shift to the right and French PM Emmanuel Macron calling for a snap election.
It was not a classic macro-driven day, which was also visible in the sector rotation where consumer staples and financials underperformed. In the US, utilities were the top performers, while banks, particularly regional ones, were among the biggest losers on a day marked by higher yields at the long end of the curve. While we do”t want to overanalyse these signals, we need to take notice and we are aware of the extend run we have had in for instance the cyclical outperformance. In the US yesterday, Dow gained 0.2%, S&P 500 0.3%, Nasdaq 0.4%, and Russell 2000 0.3%.
Asian markets present a mixed picture this morning, with Japan on the rise and China leading declines. Likewise, US and European futures are mixed.
FI: European yields started off on a weak footing, led by underperformance of France and Italy, on the back of the EP election on Sunday. While Italian bonds recovered somewhat, the French underperformance was quite clear through the day as risk premium rose after Macron made the surprise move of calling for a National Assembly election later this month (first round). French bonds widened 8bp vs. 10y German Bunds, to the widest level this year at 55bp. Relatively to other names such as Portugal and Belgium, French bonds are now just 8bp and 4bp cheaper than those.
FX: The EUR sold off against the rest of the G10 currencies yesterday as the market digested the fall out of the EU parliamentary elections. EUR/USD extended the drop from Friday and fell firmly below 1.08.
