Markets
US economic data for a third day straight surprised to the upside. Starting Monday with the US manufacturing ISM and continuing on Tuesday with the JOLTS job report, we’ve seen solid ADP employment growth (122k) and an above-consensus services ISM (54.5 from 53.6) yesterday. May business activity expanded at the second-fastest clip (57.7) in more than 1.5 years while new order inflow picked up as well (57.3). The employment index virtually matched April’s 48, which still weighed in the headline index. The supplier delivery index eased from April’s 4.5 year high to 55.2. The prices subseries (71.3) meanwhile hit the highest since August 2022. Ongoing decent-to-strong economic data fuel market bets for a Fed rate hike with the implied probability for a 25bps move by year-end growing to 80% yesterday. Fed speak is adding traction. Dallas president Logan said inflation isn’t headed for the 2% target but instead trending toward the mid 2s. With the labour market broadly balanced, AI investment booming and financial conditions accommodative, she is increasingly concerned that higher interest rates may be needed later this year to do the job. Logan was one of the dissenters over the dovish bias that still featured the April policy statement. Logan’s hawkish comments rhyme with Cleveland Fed Hammack’s, another April dissenter, earlier this week. US rates yesterday finished between 3.7 and 5.1 bps higher with rising oil prices ($97.8) on lingering geopolitical worries contributing to the move. EU yields rose in similar fashion. ECB’s Elderson was the latest in a series of policymakers (Schnabel, Wunsch, Simkus …) arguing that it is no longer possible to look through the Iran shock. The quiet period has now kicked in with a hike next week fully baked in. ECB president Lagarde speaks today but the rules in theory don’t allow her to touch on monetary policy. The US dollar strengthened against the backdrop of a souring risk mood. EUR/USD slid to 1.16 and DXY’s close (99.53) was the highest since the April 8 ceasefire was announced.
A disappointing after-market outlook from tech-giant Broadcom is weighing on stock sentiment this morning. A US-brokered truce between Israel and Lebanon is offering some counterweight though. Iran has repeatedly called for Lebanon to be included in any peace deal. Oil prices stabilize around $97, at least suggesting some form of market skepticism towards the ceasefire and by extension such a peace agreement. The (US) economic calendar is taking a backseat today before culminating into tomorrow’s May payrolls report. Elevated oil prices should support core bond yields and the dollar in a daily perspective. A speech by Bank of England governor Bailey is worth mentioning from a sterling point of view.
News & Views
National Bank of Poland governor Glapinski spoke a day after the central bank kept its policy rate unchanged at 3.75%. He believes that rates are sufficiently high to stabilize inflation under current conditions and that there is no reason to change them or even discuss changes. Glapinski highlighted that slowing wage growth is positive for the Polish CPI path with inflation currently running at 3.1%Y/Y (May) and within the NBP’s target range. He added that the inflationary shock is much smaller than the energy shock in 2021-2022, but also smaller than initially feared. It remains limited to raw materials and fuels. On top, demand growth is not excessive and the situation on the labour market less strained. Polish markets barely reacted to this week’s policy decision and press conference with EUR/PLN holding around the 4.24 mark. Polish money markets stick with a minor tightening bias, discounting a rate hike on a 6-month horizon.
The Republican-controlled US house voted 215-208 in favour of a resolution which directs US President Trump to remove US armed forces against Iran unless explicitly authorized by Congress, other than to defend America, an ally or partner from imminent attack. Four Republicans joined united Democrats in voting in favour. The resolution will now move on to the US Senate which blocked earlier attempts to install some kind of oversight on several occasions already. More and more signs of (war) fatigue are showing up though. Last month, a Senate resolution to end the war also advanced past a procedural hurdle, but hasn’t yet come to a formal vote.
 and an above-consensus services ISM (54.5 from 53.6) yesterday. May business activity expanded at the second-fastest clip (57.7) in more than 1.5 years while new order inflow picked up as well (57.3).){kind=link}