Markets eye JOLTS, but Friday's Payrolls key to judging Fed's wait-and-see stance
Markets
Markets clearly struggled to find a coherent directional storyline yesterday. A new layer of trade uncertainty (US potentially raising steel tariffs to 50%, mutual US‐China accusations of not meeting the Geneva agreements) caused investors to start with a guarded risk off bias, weighing on the dollar and on equities. Core yields kept an upward bias (higher risk premia? inflation fears?). The US manufacturing ISM confirmed the stagflationary risk related to US trade policy. Activity data disappointed. The headline index eased further in contraction territory (48.5), showing little relief from the truce in reciprocal tariffs. Some sub‐series (production, orders, employment) were less negative but remain sub 50. A sharp decline in imports suggests further supply chain complications. Elevated prices paid (69.4) confirmed ongoing stagflationary risks. In a first reaction, yields, the dollar and equities declined further. Subsequent rebound, especially in equities, was a bit remarkable. US indices reversed losses and closed in positive territory (S&P 500 +0.41%). US yields added about 3‐4 bps across the curve. We see the move mainly as technical in nature with markets holding recent ST ranges. In a similar move to the US, German yields added between 1.3 bps (2‐y) and 3.2 bps (30‐y). With respect to the risk persistent high long term yields, central bankers and government issuers recently indicated they might take action to restore the supply balance. In this respect, BOE’s Catherine Mann addressed the tensions between unwinding the BoE’s balance sheet via QT and at the same time easing policy via (gradual) rate cuts. This suggests some internal debate on the pace of QT to be decided for October. The minutes of a meeting between the BOJ and financial institutions this morning also illustrates this issue. The question is whether changing supply across the curve will be enough to manage the broader issue of excessive deficits risk premia. The dollar post‐ISM closed near the intraday lows (DXY 98.7, EUR/USD 1.1441).
Asian markets show no clear trend this morning. A weak Caixin manufacturing PMI (cf infra) triggered further calls for new stimulus. A Japanese 10‐y bond auction met decent demand. USD rebounds slightly. Today, the EMU flash May CPI is expected to print at 0.0% M/M and 2.0% Y/Y (core expected at 2.4% from 2.7%). We don’t expect the data to change markets’ assessment the Thursday’s expected 25 bps rate cut. The focus turns to the staff forecast and Lagarde’s guidance (pause?). In the US, JOLTS job openings are interesting, but markets probably will wait for Friday’s payrolls to draw any conclusion on the (length of the) Fed’s current wait‐and‐see stance. Even as there is some ‘improvement’ this morning YTD lows in the dollar (DXY, EUR/USD) stay within reach.
News and views
China’s Caixin manufacturing PMI signaled a first deterioration in operating conditions in eight months. The headline figure slumped from 50.4 to 48.3 (lowest since September 2022) with consensus expecting a slight improvement. Manufacturing output declined alongside a renewed fall in new orders. Incoming new work contracted at the quickest pace in over two‐and‐a‐half years. Export orders also shrank at a faster pace. In line with reduced operations, firms cut back on their purchasing activity and lowered their staffing levels. Turning to prices, average input costs and output charges continued to decline. Moreover, the rates of reduction accelerated since April. Finally, optimism picked up since April as firms grew more hopeful that trade conditions can improve and the widening of export markets will help to drive sales in the year ahead. Caixin Insight Group suggested that Chinese policy needs further evaluation. “Follow‐up actions should be introduced based on actual conditions. More importantly, boosting domestic demand should be grounded in increasing household incomes by improving employment environment, strengthening social security, raising household disposable income, improving market expectations, and ultimately driving a continued economic recovery.”
Polish PM Tusk will seek a confidence vote, which he’s unlikely to lose, to shore up support for his pro‐European coalition government after his candidate narrowly lost presidential election against nationalist PiS‐nominee Nawrocki. That way, the biggest opposition party holds on to a key mandate which is more than just ceremonial. PM Tusk said he has an “emergency plan” in case of a continued difficult cooperation with the (new) president. Nawrocki is unlikely to side with Tusk to support legislation and is for example strongly opposed to ease the country’s strict abortion law. Polish markets reacted orderly yesterday to the overall status quo. The zloty temporary spiked to EUR/PLN 4.27 before returning to the 4.24‐area.
Author
KBC Market Research Desk
KBC Bank
