Fed to hop?

The US dollar gained, and the euro fell yesterday, after data from the Eurozone countries showed a faster-than-expected easing in inflation, while the job openings data from the US hinted, yet again, at further resilience in the US jobs market.  

Falling EZ inflation 

Inflation in France fell from 6.9% to 6% in May, versus 6.4% expected by analysts. That was a nice beat. The French producer price inflation fell more than 5% over the same month, mostly thanks to the falling energy prices. Inflation in Germany fell from 7.6% to 6.3%, defying an uptick to 7.8% expected by analysts. Inflation in Italy eased as well, though not as much as analysts expected. The Eurozone’s aggregate inflation data is due this morning, with a chance of beating analysts’ expectations to the downside, maybe below 7%. This would be good news for softening the ECB rate hike expectations, but 7% is still more than twice the ECB’s policy target of 2% and will certainly not derail the ECB from its trajectory of at least two more rate hikes, if not three.  

Fed to hop? 

Across the Atlantic Ocean, the JOLTS data came in to support the Federal Reserve (Fed) hawks, yesterday. The US job opening made an unexpected U-turn in April and stepped back above the 10 million mark. Today, the ADP report is expected to reveal around 170K new private job additions in the US in May. But the negative surprises on the ADP front barely led to negative surprises in NFP print over the past months. Therefore, the chances are that we will continue seeing the Fed hawks fly low before Friday’s jobs data. 

As a result of softer European inflation and stronger US job openings data, the EURUSD fell as low as 1.0635 yesterday, and the yield spread between the German and US 10-year bonds fell to the lowest levels since the end of February. The downside pressure in the EURUSD could extend to 1.05 mark, which is the major 38.2% Fibonacci retracement on September to April rebound, without damaging the positive trend building since September. But, for the 1.05 to serve as a defense to the bullish trend, we need a stronger signal that the Fed would pause hiking the rates.  

And this is not the case for now. Even though, the Fed funds futures are back pricing in the possibility of no rate hike in June as the base case scenario, noises from the Fed members hint that a pause to rate hikes in June wouldn’t necessarily mean that there won’t be another 25bp increase by the end of July.  

Profit taking

The US House cleared the debt limit bill despite critics both sides. With the bill now headed to the Senate, it’s almost certain that it will get approved before the June 5th deadline.  

One would’ve expected a relief rally on the back of the news that the debt ceiling crisis is almost over, but the stock markets gave a muted reaction. The more than 5.5% slump in Nvidia shares outweighed the debt ceiling optimism.  

As a result, the S&P500 closed 0.60% lower and Nasdaq 100 fell 0.70% as a sign that we will probably see profit taking after the massive AI-triggered tech rally, and after the debt ceiling is raised.  

Equity traders will shift their focus back to more hawkish Fed expectations and rising yields, while the Treasury will suck liquidity back to refill its General Account that has almost emptied with the extended debt ceiling crisis.  

The US 2-year yield is up this morning after a two-session fall, while the 2-10-year portion remains severely inverted keeping recession odds well alive. Today, the ISM manufacturing data is expected to confirm further contraction in activity in May.  

Caixin optimism 

In China, the Caixin manufacturing index printed a number above 50 for May, in the expansion zone, in contradiction with the official PMI which unexpected showed a faster contraction the same month earlier this week. The latter may have helped halting bleeding in crude oil, which lost more than 2.50% yesterday, and more than 10% since the May 24 peak, when the Saudi Prince Bin Salman had warned sellers that it would ouch at the next OPEC meeting.  

The barrel of US crude tipped a toe below $67pb yesterday, and trades a touch above the $68pb this morning, with sellers showing their teeth to Saudi Prince and his warnings. The dynamics in oil prices gives a solid indication that any OPEC-led rally will serve as opportunity to sell a top.  

Zooming into the Chinese stocks, today’s better-than-expected Caixin data gave a little boost to Hang Seng index, which tracks a number of mainland stocks, but the index fell 20% since the beginning of this year, and is at the door of the bear market, whereas the US and European stocks were well bid since the start of this week.  

European stocks sputter 

The European stocks fell off the race in the second half of May, at about the same time the euro peaked against the US dollar.  

The Stoxx 600 index follows the EURUSD very closely, hinting that a further weakness in the EURUSD should continue weighing on European stocks. The soft rebound in Chinese economy, and rising recession odds in the US weigh on European luxury goods makers, which have been carrying the rally on their shoulders since last year. Hermes, which doubled its share price in about a year gives toppish signs near the 2000 mark, while LVMH is testing the minor 23.6% Fibonacci support on the past year’s rally. The current levels look good for further correction in European luxury stocks.