Markets
Since the conflict in the Middle East, eco data were almost ‘by definition’ considered outdated as markets try to assess the impact of higher energy prices and other supply disruptions as the conflict developed. However, especially US data have regained relevance of late. The combination of a resilient economy (strong ISM’s) and reaccelerating inflation made Fed policy makers and markets pondering whether the next Fed move should be a rate hike. Friday’s May payrolls reinforced that process. The US economy added 172k jobs, almost double the expectations. Figures for March and April were upwardly revised by 93k. This is no longer the “no hire, no fire” stalemate that inspired Fed caution end last year. The strong payrolls turn the focus back to the price stability part of the Fed’s mandate as US May headline CPI (to be published Wednesday) is expected to surpass the 4% mark. US yields added between 10.4 (2-y) and 2.1 (30-y) bps. Markets now (more than) fully discount a Fed rate hike by December meeting. Fed’s Hammack at least also suggested that it might soon be “appropriate to act on rates”. Gains in German yields were understandably more moderate (from +3.1 bps (2-y) to 0.8 bps (30-y)). The sharp rise in (real) US yields came at a difficult time for especially US equity markets. Indices got captured in spiraling down move. The S&P 500 lost 2.64%. Rising (real) yields didn’t help to dent developing doubts on AI-related valuations. The Nasdaq corrected 4.18% following a two-month breathtaking rally. The combo of higher US yields, an outright risk-off and little prospect on a solution to the Middle-east conflict provided a perfect set-up for the dollar. DXY cleared the 99.54 resistance area to close the week at 100.07, the best level since early April. EUR/USD tumbled below the 1.16/1.1575 support area to finish at 1.152. USD/JPY surpassed the 160 barrier (currently 160.3). This is seen as potential intervention territory. Question is how appropriate it is for Japanese authorities to use ammunition to fight what is basically USD strength.
Sentiment in Asia this morning remains outright risk-off. Aside from the payrolls/AI-related sell-off in the US on Friday, a new flaring up in the Iran conflict (especially reciprocal strikes between Iran and Israel) put further pressure on equities (Kospi -7.7%) and bonds (US yields adding 3-4 bps across the curve). Given multiple uncertainties at the start of week there is little reason to fight the trends from end last week (higher yields, stronger dollar, equities in the defensive). Later this week, aside from developments in Iran, the US CPI and the ECB policy decision will take center stage. US headline inflation at 4%+ and core nearing/hitting 3% might further reinforce Fed rate hike bets. The ECB is widely expected to raise the policy rate by 25 bps. Key question is whether/how strong Lagarde will guide to a potential back-to back rate hike already at the July meeting. Last but not least, also keep a close eye at the 3-y/10-y/30-y US Treasury refinancing operation to assess investor appetited at current levels.
News & Views
Permanent placements in the UK declined at the fastest pace since last July, the monthly jobs reports by KMPG, REC and S&P for May said. UK companies blamed low confidence around the outlook and greater cost pressures for the pullback in permanent hiring. Those that did want additional staff often looked to more flexible solutions instead. That supported the strongest rise in temp billings for over three years. Overall vacancies fell by the quickest in three months, driven by the permanent job segment. Demand for temporary workers moved closer to stabilization. Recruitment companies reported redundancies, fewer job opportunities and concerns over current job security to have pushed up the availability of job candidates sharply. That in turn has dampened rates of pay growth in May, together with lower demand for staff and tighter client budgets. Starting wages and temp wages increased modestly at a pace that was slower than in April and well below the historical average.
The seven OPEC+ members that are engaged in the monthly quota adjustments decided yesterday on another modest 188k barrel increase for next month, further restoring the double-layered production curbs introduced in 2023. The decision is merely a symbolically one since much if not all of the additional output isn’t able to leave the Middle East area with the Strait of Hormuz still effectively closed. The price of a barrel of Brent oil remains therefore unaffected, instead eying the recent renewed skirmishes in the region. Brent currently trades around $97.3, up from Friday’s $93 close. In other oil news, Saudi Arabia lowered the price of its flagship Arab Light crude for a second month straight. Asian buyers will pay $6 a barrel less from next month on, reducing the premium over the regional benchmark to $9.50 a barrel, still near the highest in decades, according to Bloomberg. European buyers will pay $10 less for all grades, while varieties for North America were cut by $2 per barrel.
 and reaccelerating inflation made Fed policy makers and markets pondering whether the next Fed move should be a rate hike.){kind=link}