Today’s key data/events with market upside potential are yet to be released after finishing this report with the US Manufacturing ISM and to a lesser extent the Fed Beige Book providing initial input for the Fed’s June 14-15 policy meeting. However, European investors preferred to err on the side of caution. The astonishing increase in EMU inflation in May (8.1%) as published yesterday continues to fuel the debate on whether the ECB has the possibility to continue on the path of gradualism, as recommend it by President Lagarde and the chief economist of the ECB Lane (who is due to speak this evening). In an email comment to Bloomberg, ECB arch Hawk Holzmann clearly ‘was forced’ to use yesterday’s data to highlight the case for a 50bps takeoff at the July meeting. He considers this to be a necessary signal that the ECB is serious about its fight against inflation and that it could support the weak exchange rate of the euro, which does not help controlling inflation. At the same time, a big miss in April German retail sales (-5.4% M/M), an admittedly very volatile series, forcefully reminded us that the tightening will have to take place in an environment of decelerating growth and fragile confidence. European stocks initially struggled to avoid further losses after yesterday’s setback, but sentiment improved as US trading approached. The EuroStoxx50 gained around 0.4%. US stocks outperformed, opening with gains of up to 1.1% (Nasdaq). US and European interest rate markets remain focused on inflation rather than growth. German yields are trending further north even after strong gains yesterday and Monday, gaining between 1bp (5y) and 4bp (30y). The German 30-year yield continues to set new cycle highs north of 1.40%. On the short end of the European curves, the 2-year swap is largely testing the peak of early May (1.10% zone). US yields show a similar picture with the 2-year yield gaining 3 basis points while the 30-year is trading thin.
The relative calm in the interest rate markets is causing directionless trading in major currency cross rates. The DXY USD is trading little near 101.90. A similar consolidation is visible in the EUR/USD cross rate (slightly below 1.072). The recent rise in US and European yields after a temporary rebound again puts the yen on the defensive (USD/JPY 129.34 and EUR/JPY 138.72). The British pound underperforms the euro (EUR/GBP 0.8540) and the dollar (1.2565 cable) as UK markets prepare for a long weekend.News headlines
The The euro zone unemployment rate stabilized at 6.8% in April, reaching the lowest level on record. The unemployment rate for men fell from 6.5% to 6.4%, while that for women was stable at 7.2%. Youth employment (under 25) fell from 14% to 13.9%. At the national level, Germany has the lowest rate in the EMU with 3%. Outside the monetary union, The Czech Republic has an even tighter labor market with an unemployment rate of 2.4%. Spain is the opposite with 13.3%. The Belgian unemployment rate fell from 5.6% to 5.7%.The Federal Reserve will begin its quantitative tightening process this month. They aim to reduce the lofty balance sheet ($8.9 billion) to more “normal” levels. In practice, they will stop reinvesting proceeds from maturing bonds in their QE portfolios. From June to September, they will cap the monthly run-off at $47.5 billion, made up of $30 billion in US Treasuries and $17.5 billion in mortgage-backed securities. Then the caps will double to a combined $95 billion per month. That compares to a peak pace of $50 billion during the 2017-19 period when the Fed slowly reduced its balance sheet from about $4.5 billion to about $3.8 billion. The Fed has a total of $48.5 billion in Treasury redemptions this month, starting June 15, which involves a run-off of $30 billion and reinvestments of $18.5 billion. .