In focus today
Today’s main events will be the US May CPI at 14.30 CET followed by the FOMC rate decision at 20.00 CET. We expect the Fed to maintain monetary policy unchanged in line with broad consensus and market pricing. The median rate projection on the updated ‘dot plot’ is likely to signal only two rate cuts this year (prev. three) while economic projections will likely remain little changed, see Research US – Fed preview: No urgency, 7 June. We forecast headline CPI inflation at 0.19% m/m SA (Prior: 0.3%; Cons: 0.3%) and Core CPI at 0.25% m/m SA (Prior: 0.29%; Cons: 0.3%). We see risks tilted towards a dovish market reaction over the course of the day.
In the UK we get the monthly GDP figures for April. After a strong start to the year Q1 growth at 0.6% q/q, consensus expects a more muted print at 0.0% m/m for April.
In Germany, we receive the final inflation figures for May. The monthly increase in services inflation was very strong and the details will show much of this was due to the one-off increase in airfare taxes that increased by 19% on May 1 and how much was broad-based pressures.
Economic and market news
What happened overnight
In China the CPI print came in at 0.3% y/y (Cons: 0.4%, Prior: 0.3%) while the PPI came in at -1.4% (Cons: -1.5%, prior: -2.5%). Overall, the print still shows deflationary pressures in China with m/m change at -0.1%. Weak consumption is still supporting low prices and consumer confidence, despite several rounds of support measures.
What happened yesterday
ECB’s Lane said Yesterday that ECB should wait with its next rate cut until uncertainty recedes. Lane argued that the key unknown is wage growth, saying that the bank will need to maintain a restrictive monetary stance. The comment seems in line with President Lagarde’s interview on Monday, when she said that ECB could wait more than one meeting between cuts. On the other hand, Villeroy sounded way more dovish saying that there is ‘significant leeway’ to cut rates and still stay restrictive and that further cuts should be made without haste or procrastination. We expect the ECB to cut interest rates once more in 2024 at the December meeting.
10y French government bond yields widened further vs. 10y German bunds to 60bp, up from 55bp on Monday and 47bp on Friday. The French Cac 40 stock index fell to its lowest point since February. The changes show that markets still worry about future economic policy after President Macron called a snap parliament election. His party gained only around half the votes of primary presidential opponent Le Pen’s party Rassemblement National (RN) at Sunday’s European Parliament (EP) election. Macron has announced policies to strengthen public finances and reduce government debt. If RN gains majority markets see a risk that the French government will withdraw these actions and increase the budget deficit even more. Often the EP elections have been protest elections in France, not necessarily meaning that the same result will show in national elections. From here we look out for the two elections dates on 30 June and especially second round 7 July, where the final election result is determined.
In the US we got mixed signals from the May edition of NFIB’s small business survey. The general optimism and future outlooks edged cautiously higher (albeit from a low level). At the same time, uncertainty rose to the highest level since the previous election month of November 2020. Price plans rose slightly from April but remain below Q1 levels. All-in-all, nothing that should move the markets here.
In the UK, the labour market report for April/May was to the weak side. Wage growth excl. bonus remains at 6.0% 3M/YoY (cons: 6.1%, prior: 6.0%) with the increase in the National Living Wage taking effect in April underpinning wage growth. While the report acts as input, the BoE has highlighted that it looks at a range of indicators to assess the tightness of the labour market noting the poor data quality of the survey.
Market movements
Equities: Global equities ended marginally lower yesterday, with the US pushing higher and ending close to the day’s highs, while Europe, led by the peripherals, trended lower. We must admit i’’s surprising for us to see the European Parliament election, the subsequent announcement by Macron, the cut of Frenc credit rating having such a significant market impact. The bond spread between Germany and the peripherals, including France, widened considerably again yesterday, with banks underperforming. It is worth noting that banks were also a notable underperformer in the US yesterday. The politically driven markets are not behaving as we have been advocating for, and both sector and regional rotations are not going in our favour. In the US yesterday, the Dow was down by 0.3%, the S&P 500 was up by 0.3%, the Nasdaq increased by 0.9%, and Russell 2000 decreased by 0.4%. Asian markets are mixed this morning, while both European and US futures are trending higher.
FI: European rates were bid through most of the day driven by dovish comments from Villeroy where he said that there is’‘significant leewa’’ to cut rates and still stay restrictive and that further cuts should be made without haste or procrastination. Earlier in the morning Lagarde said that the’‘appropriate decisio’’ last week’‘does’’t mean interest rates are on a linear declining path. There might be periods where we hold rates agai’’. Bunds ended 5bp lower on the day at 2.62%.
FX: EUR sold off further yesterday against most of G10 amid French political uncertainty with EUR/USD trading close to the 1.07 mark. In this regard, we also note that EUR/CHF and EUR/DKK has dropped in recent days-– an early sign of rising safe-haven demand in currency markets.
 while economic projections will likely remain little changed, see Research US - Fed preview: No urgency, 7 June. We forecast headline CPI inflation at 0.19% m/m SA (Prior: 0.3%; Cons: 0.3%) and Core CPI at 0.25% m/m SA (Prior: 0.29%; Cons: 0.3%). We see risks tilted towards a dovish market reaction over the course of the day.){kind=link}