First G7 and ECB cuts hit headlines

Welcome back to SovereignBeat!

In this publication:

• Fed's mixed data keeps yields on a rollercoaster ride.

• G7 country sees its first rate cut.

• ECB lived up to expectations, but bumpy road lie ahead.

• Equity markets soar, but AI stocks will likely to lose some steam

• Oil prices keep falling despite OPEC+ cuts.

Let’s dissect

Markets Snapshot

Bond Markets and FX

• US: Last week, fresh data suggested a robust yet gradually easing labor market. The U.S. economy added 272,000 jobs in May, surpassing expectations by 82,000, but the unemployment rate ticked up to 4%. Despite the labor market's resilience alleviating concerns of stagflation and bolstering the Fed's stance to maintain current policy throughout the summer, a normalization process is underway. Slower hiring demand is expected to result in slower wage growth, which is a pivotal factor in services inflation. Additionally, Tuesday's JOLTs job report revealed a decline in openings from 8.49 million in March to 8.06 million in April, missing the analyst consensus of 8.34 million and signalling a cooling labor market.

• The US 10-year Treasury yield closed the week at 4.43%, rebounding from a dip to 4.35% on Tuesday. Initially, the decline in job openings and the ISM PMI for the factory sector drove the decrease in yields and raised expectations of Fed rate cuts in September . However, doubts emerged on Friday among executives, economists, and traders regarding any rate cuts this year, after the news that the US added considerably more jobs than expected in May. This caused yields to rise to 4.43% and lifted the ICE U.S. Dollar Index by 0.8%. The market probability of an implied rate cut currently stands at 65% in September and 77% in November.

• Canada: On June 5th, the Bank of Canada (BoC) became the first G7 country to lower interest rates. This move, widely anticipated, is aimed at alleviating pressure on highly indebted consumers. However, the Bank indicated that any further easing would be gradual and contingent upon data. After six consecutive pauses, the BoC decreased the overnight rate to 4.75%, having maintained it at 5% since July last year. Canada’s economy has experienced a slowdown in recent months. First-quarter GDP growth of 1.7% fell short of consensus expectations for 2.2%, and April's unemployment rate of 6.1% was the highest in over two years. Additionally, headline inflation stood at 2.7% year-on-year in April.

• EU: Right after BoC, the ECB lowered its three key interest rates by 25 bps setting the main refinancing operations rate at 4.25%, the deposit facility rate at 3.75%, and the marginal lending rate at 4.5%. The price pressures remain high. Eurozone inflation, which peaked at 10.6% in 2022, has declined to 2.6% in May. However, last month's figure indicated an acceleration from a lower 2.4% in April.

• Following its first interest rate cut in five years, several ECB policymakers have advocated for a cautious approach to further reductions. With recent increases in inflation and wage growth, another cut at the next meeting in July seems improbable. The release of wage data on Friday has heightened concerns about persistent price pressures, with pay per Eurozone employee rising at an annual rate of 5.1% in the first quarter. Consequently, swaps traders have decreased their bets on the likelihood of a second cut by September to 56%, down from 70% prior to the meeting.

• ECB move follows a rate cut made by BoC a day earlier and is part of a trend seen in central banks worldwide. Earlier this year, monetary policy easing was observed in central banks in Brazil, Mexico, Chile, Switzerland, and Sweden. In contrast, the US Federal Reserve is expected to maintain rates at a 23-year high range of 5.25% to 5.5% in the upcoming week. Likewise, the Bank of England is unlikely to reduce its bank rate from a 16-year high of 5.25% during its meeting scheduled for June 20th..

Equity Markets

• The S&P 500 Index and technology-heavy Nasdaq Composite hit fresh record highs last week on signs that the economy, labor market and central-bank policy are normalizing. Some momentum for the AI stocks might diminish as the reports surfaced that U.S. officials have slowed the issuance of licenses to chipmakers for AI chip sales to the Middle East as well as antitrust investigations have been initiated into Microsoft and NVIDIA regarding their dominance in AI.

Commodity Markets

• Oil: After OPEC+ extended certain oil output cuts to 2025, as mentioned last week, oil prices fell following the announcement, declining by more than 2% below $80 last week. Oil prices have been driven lower primarily due to demand concerns . which have been heightened by consistent weakness in global manufacturing data. It was intensified early last week when crude oil slumped to its lowest level since February following weak US factory data that triggered a sell-off. OPEC+ has failed to support oil prices, as the decision to extend output cuts was already priced in. Despite this decline, today's oil price remains above the 2015-2019 average of $58.

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