Markets
Markets were counting down to the June US payrolls as it could further shape expectations on Fed tightening and the implications for financial conditions globally. In the meantime, yield curves in Japan, the UK and Europe embarked on a steepening trend, a development that tentatively restarted over previous sessions. The short end of the curve apparently is ‘better protected’ as the comments from ECB and BoE policymakers of late suggest that the decline in the oil price is buying time to assess next policy steps. German yields rose between 2 bps (2-y) and 4.5 bps ahead of the US payrolls. For the UK and the Japanese yield curve this was respectively +2 bps (2-y) and 6 bps (30-y) and minus 0.6 bps and +5.7 bps (30-y). The move in JGBs was reinforced by an uninspiring 10-y JGB auction. Investors apparently still ask higher premia as the Japanese government aims for a supportive fiscal policy to propel (nominal) GDP growth. At the same time, it wants the BoJ to join (or at least not to counteract) this policy ambition. The rise in long-term bond risk premia this time didn’t hurt the likes of sterling or the yen. After touching the highest level in 40 years (weakest for the yen) at USD/JPY 162.84 yesterday, the pair dropped to the 161.4 area ahead of the payrolls as markets apparently fear imminent interventions (e.g. in a context of thinner market liquidity when US markets are closed tomorrow). Sterling also gained further, extending yesterday’s break below the 0.86 range bottom that marked the floor of a trading range at work for about a year. EUR/GBP traded near 0.856 ahead of the payrolls release. The euro also slightly outperformed the dollar but lost against the likes of the yen and sterling.
These moves evidently still had to be validated by the reaction to the US payrolls report. After three solid monthly reports, the US economy in June only created a net 57k jobs, with on top a negative revision of 74k for the previous two months. The miss was mainly due to a surprise decline in leisure and hospitality (-61k, potentially attributable to World Cup effects). Professional business services (+36k) and private education and health (+69k) contributed positively. There was also a marginal rise in manufacturing jobs (+3k). The unemployment rate (derived from the household survey) declined from 4.3% to 4.2%, but ‘for the wrong reason’. Employment in this survey declined 507k, but less than the fall in the labour force (-720k), suggesting lower participation. Average hourly earnings printed as expected at 0.3% M/M and 3.5% Y/Y. The strong swings in the household survey probably won’t go unnoticed by Fed Chair Warsh as the Fed is taking a look at data accuracy/reliability. Even so, the US yield curve steepens with the 2-y yield easing 4 bps. The 30-y still adds about 2 bp. Markets now only see about 20% probability of a July rate hike (from about 30%). A 25 bps step is now only fully discounted by December. Yields in EMU/Germany and the UK reacted only marginally compared to pre-payrolls levels (1-2 bps lower at the short end of the curve). The dollar faces a setback. DXY tumbles from the 101.2 area to currently trade near 100.8. EUR/USD rebounds to the 1.1445 area. Even the yen extends intraday gains against the dollar to trade near USD/JPY 161. Equities enjoy the ‘diminishing chance’ of tighter financial conditions. The Eurostoxx 500 gains 1.3%. The S&P escaped from a negative open (+0.3%).
News & Views
Germany’s government coalition overcame weeks of friction to agree on a wide-ranging reform package aimed at reviving the economy’s long-term growth potential and reforming social welfare, the pension system and the labour market. It also includes support for critical sectors such as AI, semiconductors and batteries. It also offers €10bn in annual income tax relief for small- to middle-earning households. Discussions about the eventual 34-point package got an important boost last week when coalition partners largely agreed on the pension overhaul while they were still apart on the tax cuts. CDU conservatives had long resisted financing it (partially) with a higher tax rate on top earners. The legislative blueprint is meant to evolve into a comprehensive plan by the parliamentary summer recess that begins at the end of next week.
Swiss inflation stagnated in June on a monthly basis, allowing the Y/Y figure to cool down from 0.6% to 0.5%. Core CPI defied an expected uptick to 0.4% by matching May’s 0.3% y/y. Prices increased for fruiting vegetables, stem vegetables, hotels and other accommodation providers as well as for car rental and car sharing. These were offset by lower prices, mainly for energy-related products. Recent weakening of the franc doesn’t appear to have filtered through yet with imported inflation falling by 0.4% m/m, to be up only 0.2% y/y. EUR/CHF traded unchanged on the release before slipping through 0.92, but the pair bounced back to trade slightly lower on the day around that big figure. Swiss money markets continue to lean toward a rate hike rather than a cut from zero. The implied probability for such a move this year is low (approximately 25%).
