Markets
A temporary EUR-setback in early European trading disturbed an otherwise calm run-up to the June payrolls report. EUR/USD set a new intraday/cycle/two decade low around 1.0070. There was quite some buzz on details from energy rationing measures in Germany, but the general principle – stage two of the gas emergency plan – was already decided on end last month. Germany (and Europe) now await an anxious period between July 11 and July 21, when Nord Stream 1 is shut down for scheduled maintenance. The billion dollar question is whether gas will flow again after July 21 or not. From a market point of view, it could have a bigger impact than the ECB’s first policy rate hike this cycle (and in over a decade) a day earlier. Anyway, June payrolls beat consensus with net job growth coming in at 372k vs 265k consensus. A 74k downward revision to the previous two month’s cumulative numbers downplays the upward surprise. The unemployment rate stabilized at the cycle low of 3.6%, but there was a setback in the labour force participation rate (62.2% from 62.3%). Wage growth printed near bang in line with expectations at 0.3% M/M and 5.1% Y/Y. It’s telling about financial market fragility these days that such “average” payrolls outcome generated a rather outsized move. Especially US Treasuries sold off. We understand the logic that this print removed any remaining doubt on the Fed’s determination to move on with back-to-back jumbo 75 bps rate hikes. As Atlanta Fed Bostic reacted after the labour market report: “we can move by 75 bps without damaging the economy.” He did warn that he was starting to see the first signs of economic slowdown. The US yield curve bear flattens at the moment of writing with yields rising by 5.5 bps (30-yr) to 10 bps (2-yr). UST’s massively underperform German Bunds with the German yield curve even bull steepening somewhat. Yields lose 4.1 bps (2-yr) to 0.5 bps (30-yr). Interestingly, the dollar failed to revisit the intraday highs despite this massive relative yield advantage. EUR/USD keeps its nerve around 1.0150. Stock markets and risk sentiment give no guidance either, trading near flat on the day. We end our recap with a little follow-up on EUR/GBP’s downside break out of the upward sloping trend channel earlier this week: there was none. The pair changes hands around 0.8460.
News Headlines
Hungarian inflation quickened from 10.7% to 11.7% on a monthly pace of 1.5%. That was a little more than the 11.5% analyst consensus. MNB-calculated core inflation (ex non-processed food, energy, pharmaceutical products and services with regulated prices) shot up again by 1.9% m/m to 13.8%. Both are the highest readings since 1998 and leave the central bank zero scope to slowdown the pace of monetary tightening. It hinted at doing so a few weeks ago, after which the Hungarian forint went into a tailspin, boosting (imported) inflation even further. EUR/HUF hit new record low in the 415-417 area over the past few days. Seeking to floor the currency, Budapest yesterday raised its weekly deposit rate by a stunning 200 bps to 9.75% but it’s impact was minimal. EUR/HUF fell towards 403. The pair holds on to those levels after some intraday volatility post-CPI.
Canadian net employment fell by 43.2k in June. Expectations were for a 22.5k increase. The decline mainly occurred in the part time sector (-39.1k). The unemployment rate hit a new all-time low at 4.9% though was accompanied by an unexpected and large retreat in the participation rate from 65.3% to 64.9%. In absolute numbers, some 100k people left the labour market, the biggest one-month drop outside the pandemic. It adds to an already scarce labour supply and helped wage growth shot up from 4.5% to 5.3% y/y. The Canadian labour market remains extremely tight. The Bank of Canada started to tighten monetary policy in recent months, citing excess demand and inflation way above target. Today’s payrolls report leaves the BoC no option but to stay on that path. Markets priced in a 75 bps hike for the meeting on Thursday. There’s a more than 50% chance discounted for a 100 bps move. Canadian swap yields rise 3-6.4 bps. USD/CAD advances to just north of 1.30 because of strong US payrolls published at same time.
