Sunset Market Commentary

Markets

The May US payrolls report wrapped up a week of overall disappointing economic data. US JOLTS (job openings) were the proverbial exception to the rule. Monday’s manufacturing ISM and Wednesday’s services gauge painted an ugly stagflationary picture. And the poor ADP job report (a mere +37k) on Wednesday and Thursday’s higher-than-expected weekly jobless claims did not go unnoticed either. In fact, the data posed downside risks for today’s payrolls report. Those didn’t quite materialize with a job growth of 139k. The slight beat of consensus (126k) was offset by the -95k two-month revision though. The services sector (+145k) provided for all of the jobs created, led by private education & health and leisure & hospitality. The federal government shed another 22k jobs, the fourth decline in a row. Earnings growth came in to the high end of expectations (+0.4% m/m and 3.9% y/y) while the participation rate eased to 62.4%. The unemployment rate was at an unchanged 4.2%. This metric is getting close attention ever since the Fed last year started cutting rates aggressively after rising unemployment triggered the Sahm rule.

The labour report was except for next week’s CPI the final input for the Fed June 18 meeting. All in all it offered nothing spectacular and won’t nudge the debate in either direction. It’s “hold your horses” for the time being and “go all in” if needed. That was the Fed’s playbook end 2024 and the preferred approach by amongst others Fed’s Hammack. In an interview with the New York Times she said she “would rather wait and move quickly to play catch-up if I really don’t know what the right next move is”. And for the record: she really doesn’t know what the right next move is. Yet, US yields surge more than 8 bps at the front end of the curve. This is more of a kneejerk reaction than anything else. Following the ADP and jobless claims, markets were bracing for a softer than expected reading. Some extra market optimism creeped in as well after US trade advisor Navarro flagged a meeting between US and Chinese officials potentially already next week. Just yesterday, the respective presidents had their first formal contact since Trump took office. The dollar strengthens to sub EUR/USD 1.14 but the short-term upward sloping trend channel remains in tact for now. DXY bounces back to 99.17 and USD/JPY aims for 145.

News & Views

Czech industrial production (adjusted for the number of working days ) in April rose 0.9% M/M and 2.0% Y/Y, it’s statistical office reported. Admittedly, the improvement was mainly due to a strong performance of electricity producers and the improved situation in the mining industry. The manufacturing industry is lagging, stagnating year‐on‐year. Even so, the trend for the most cyclical parts of the Czech industry, led by engineering and basic metals producers, also shows a slow reversal for the better. This is confirmed by new orders ‐ base metal producers +3.2% YoY, engineering +2.0% and fabricated metal products +8.6%. On the other hand, production in the automotive segment will undoubtedly grow more slowly this year as it is bumping up against a relatively high comparison base versus last year and relatively high‐capacity utilization. Overall, the better industrial figures in April, together with very strong retail sales, show that, at least at the start of Q2, the Czech economy has been still in good shape. This comes on the back of a very strong first quarter, when it grew by 0.8% Q/Q. So, for now, we haven’t seen a significant impact of the higher US tariffs. The Czech koruna remains well bid, with EUR/CZK at 24.75, touching the best levels in almost a year’s time.

According to Bloomberg reporting referring to people familiar with the matter, Bank of Japan officials are likely considering slowing the pace of its pullback from buying government debt at the June 17 policy meeting. Officials are said discussing making smaller reductions to the BOJ’s bond buying program from current pace reducing net purchases by JPY 400 bln per quarter scheduled to be in place until March next year. From then, aside from keeping current pace of a JPY 400 bln reduction, options of reducing the pace of the slowdown to JPY 200 bln or between JPY 200 bln and 400 bln are said to be on the table. The debate on the pace/amount of BOJ bond buying recently intensified due to rising pressure at the long end of the Japanese government bond curve as investor appetite was low to pick supply in these longer tenors, sharply rising yields at those longer maturities.