Markets
Bond markets took a benign start yesterday after substantial losses over the previous sessions. In US dealings, headline driven action accelerated the move. One can argue whether it was real believe or just hope that a solution to the Iran conflict was coming closer. Whatever, headlines referring to sources close to Iran negotiators and President Trump repeating that the US was in final stages with Iran, triggered a Pavlov reaction. (Brent) Oil dropped from the $110/b+ area to near $105. Bond markets joined. After touching peak levels on Tuesday, German yields ceded between 10.2 bps (2-5 y sector) and 7.2 bps (30-y). US yields eased between 9.1 bps (5-y) and 5.6 bps (30-y). Minutes from the April FOMC meeting confirmed that the Fed is growing more concerned that it would take longer to return inflation back to target. In this respect, many officials advocated to remove the easing bias as some policy firming could be appropriate if inflation were to continue to run persistently above 2%. The less soft bias from the Minutes had hardly any impact on the bond-friendly intraday market momentum. UK gilts outperformed Bunds and Treasuries. They enjoyed softer than expected UK April CPI data. At a hearing before a Parliament Committee, BoE governor Bailey and other MPC members took quite a cautious approach on the need for tightening/rate hikes. Amongst others, they argued that conditions had already tightened due to the removal of rate cut expectations, giving the BoE time to assess the situation with the picture on growth and labour market softening. Markets at least for now turned their focus away from political and fiscal issues. UK yields declined between 13-14 bps across the curve. The relief rally on bond markets also triggered a further intraday improvement in equity sentiment. US indices rebounded up to 1.54% (Nasdaq). The Eurstoxx 50 gained 2.13%. Investors, both in bonds and equities apparently still are some kind of afraid to miss a rally on (hoped for) good news from the conflict in the Middle East. Moves in FX were again much more muted. DXY gave up on intraday gains but still closed north of 99. EUR/USD regained the 1.16 big figure. Sterling won modestly despite the loss of interest rate support (EUR/GBP 0.865).
Asia equites mostly join the risk-rebound this morning even as Investors reacted rather lukewarm to solid Nvidia results. Bond markets show no clear direction after yesterday’s rally. Idem for the dollar. EMU, and to a lesser extent US, PMI’s provide an update both on activity and prices pressures as supply chain disruptions from the Iran conflict continue. On Europe, the narrative might be stagflationary. With an initial 50 bps of ECB rate hikes priced in up until the September meeting, the market reaction might be muted, focusing again on headline news.
News & Views
Australian employment shrank by 18.6k last month. That followed an upwardly revised +23.3k growth registered in March. Both full-time (-10.7k) and part-time (-7.9k) employment fell. The number of unemployed rose by 33k, triggering an unexpected increase in the unemployment rate to 4.5% from 4.3% – the highest since end-2021. The participation rate eased a tad to 66.7%. Despite the fall in employment, hours worked rose, resulting in a 0.9% increase in hours worked per person. The sub-par labour market report doused some speculation for further rate hikes by the Reserve Bank of Australia. The central bank already did so three times in the face of stubbornly high and rising inflation before considering itself now “well placed to respond to developments”. That was taken by markets as the RBA headed towards a pause in the tightening cycle. Money markets currently still bet on one additional move by the end of the year. The Aussie dollar loses some ground today with AUD/USD easing to 0.712.
The Japan May PMI retreated to 51.1 from 52.2, the softest in five months. It still indicates economic expansion (>50), driven solely by the manufacturing sector (54.5 from 55.1). Services (50 from 51) stagnated for the first time in over a year. Stockpiling in response to the Middle East war continued to drive manufacturing (54.1 from 55.1). Japanese companies continued to report intense cost pressures. Input costs rose at a substantial pace that was the fastest since late-2022, particularly in manufacturing, on supply disruptions and raw material shortages. Own selling prices as a result increased again with the rate of charge across both sectors the sharpest in nearly 19 years of data collection. Japanese firms were generally upbeat in May for the year ahead. Optimism edged to a three-month high to nevertheless remain historically subdued. The Japanese yen shrugged at the PMIs. USD/JPY trades around 159.
