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Sunset Market Commentary

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Trading in the run-up to the US payrolls release had a lot in common with Wednesday, when markets were snoozing until a stronger-than-expected manufacturing ISM brutally woke them up. Today perhaps was even a bit worse with UK markets closed for day two of celebrating seven decades Queen Elizabeth. But unlike Wednesday, the American labour market report came in very close to expectations. A net 390k jobs were created in May, more than the 318k consensus. The goods-producing sector added 59k and the services 274k with the bulk still in leisure & hospitality (84k), education & health (74k) and business services (75k). The unemployment rate stabilized at 3.6% and the participation rate inched higher to 62.3%. Pay growth amounted to 0.3% m/m, a little less than the 0.4% forecast and equaling the previous month which saw a downward revision. US workers on average now earn a strong 5.2% more compared to the some month in 2021. Markets mainly reacted to the headline job creation figure. Perhaps the psychological consensus beat was even higher after the ADP report earlier this week tempered enthusiasm for today’s release. Anyway, it definitely does not contain any element that would allow the Fed to retrace on guidance for 50 bps hikes in June and July. Markets even increased bets for such a move in September with the labour market still going strong despite financial conditions having tightened quite substantially already in recent months. US yields add 3.9 bps to 5.8 bps. German yields rise another 3.4 bps at the medium and long end, aiming for a 5-day winning streak. The 10y yield (1.275%) builds on yesterday’s break above the 1.236% resistance level. European swap yields too are on track for new (closing) cycle highs across the curve. The underperformance of US Treasuries gives the dollar only a slight edge. The trade-weighted index (DXY) secured the 102 handle again but it’s not very convincing. EUR/USD dipped towards the 1.07 big figure in the immediate aftermath of the publication before paring losses to around 1.073 currently. That’s down from 1.075 at the open. It seems like the couple/euro won’t go down so easily ahead of the all-important ECB June policy meeting next week. USD/JPY is able to take out the 130, unlike previous days. The two-decade high of 130.85 is within striking distance. Equities reacted negatively. European stocks trade almost flat and US futures markets extended losses, resulting in a cash open of -1.60% (Nasdaq). Markets now have their eyes set the US services ISM to be published later today. Next week will be crucial as well, with a new US CPI print due.

News Headlines

The Food and Agriculture Organization of the United Nations published the monthly update its Food Price Index. The benchmark dipped slightly for a second consecutive month, from 158.27 in April to 157.36 in May. This remains the third highest level since the series started in 1990 though. The Cereal Price Index increased by 2.2%, led by wheat prices, which were up 5.6% from April and 56.2% Y/Y. The Vegetable Oil Price Index declined by 3.5%. Prices dropped for palm, sunflower, soy and rapeseed oils, due in part to the removal of Indonesia’s short-lived export ban on palm oil. The Dairy Price Index also dropped by 3.5%. Prices of milk powders declined the most, linked to market uncertainties from the continued COVID-19 lockdowns in China. The Sugar Price Index declined by 1.1%, as a bumper crop in India buoyed global availability prospects. The Meat Price Index set a new all-time high.

Turkish inflation rose by 2.98% M/M in May to a 23-y high of 73.5% Y/Y (from 69.97% Y/Y in April). Details showed food prices at a mind-blowing 91.6% Y/Y. Energy prices (121.21% Y/Y) hurt as well with the country being a huge net importer. Underlying core inflation rose from 52.37% Y/Y to 56.04% Y/Y. In a sign that the worst might still be ahead, producer price inflation accelerated by 8.76% M/M to 132.16% Y/Y in May. The Turkish central bank defied common knowledge so far this year by keeping policy rates stable at 14% (following 500 bps rate cuts end of last year). It meets next on June 23. The Turkish lira remains near the weakest levels of the year around EUR/TRY 17.75. Only for a brief spell in December last year traded the local currency even worse.

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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