Euro hits a softer patch
The dollar and equities gained and the euro fell back as data showed the US labour market is holding up while in Europe, there was political uncertainty as the short lived Dutch Government fell. The single currency was up close to $1.1450 early yesterday, but eased back to around $1.1375 now after data showed US jobs openings had risen indicating a solid labour market despite tariff uncertainty while in Europe, the Dutch prime minister resigned as the right wing party in his fragile coalition pulled out. The euro also lost a little ground to sterling, trading down from close to 84.5p to 84.1p, still a fairly tight range. As a result, the dollar gained just slightly on sterling with the UK currency still trading above $1.35.
It was a neutral session for bonds, as US and European 10-year bond yields were more or less unchanged for the day. US 10-year yields remain at close to 4.45% while equivalent term French and German yields are around 3.2% and 2.5% respectively. Spurred on by the US data, and some good news from companies, equities reversed early day losses to finish up for the day. The S&P rose 0.6% while AI darling Nvidia was up nearly 3%, pushing the Nasdaq to a 0.8% daily gain. Euro equities gained also, but by a smaller magnitude, with the Eurostoxx up 0.4% and the FTSE up 0.2%.
The US JOLTS job opening figures showed nearly 7.4m job openings at the end of April up from 7.2m in March when a drop was expected. This was an upside surprise given the current policy uncertainty in the US and indicates that the US labour market remains in a solid state – something Fed members have been pointing out as they stay on hold from easing policy – and there does not appear, yet, to have been large scale impacts from changing tariff policy. That said, the detail showed the increase in openings was driven by jobs in professional and business services as well as health care while job vacancies in manufacturing and tourism sectors fell, perhaps an early sign that tariff policy could bring pain to the jobs market in the future. The layoffs level also picked up to nearly 1.8m in April from 1.6m in March, so despite market enthusiasm for this data, it was certainly was not universally positive.
In Europe, the HICP estimate for May came in at 1.9%, just below expectations, and down from 2.2% in April. Core inflation moved down to 2.3% from 2.7%. This is good news for the Governing Council ahead of their meeting this week and supports the argument for continuing to cut rates as inflation is now just below target and with fairly shallow growth in the Euro area, and risks to the downside due to a potential trade war with the US, further monetary easing can be justified. The market has fully priced in another 25bps cut to the deposit rate tomorrow, taking it to 2.0%.
In the UK, BoE Governor Bailey defended the divided MPC saying it reflects a ‘lack of group think’. The Committee voted five to four to cut rates by 25bps last month with two members wanting a bigger 50bps cut in rates and two wanting to remain on hold. MPC member Mann said the trade off with transparency is that it risks sending confusing messages as members air individual opinions. In fact, Bailey and Mann aired their differences in front of the Treasury Committee with Mann saying that inflation will get back to target ‘at some point’ but the labour market had not loosened much and pointed to remaining pressure in inflation, while Governor Bailey said he felt the labour market had loosened and inflation was progressing as expected, suggesting he favoured more cuts. The market is not fully pricing in another 25bps cut from the BoE until well into the autumn with the MPC expected to remain on hold at their meeting this month.
Looking to the day ahead, ADP employment in the US and ISM services as well as the latest edition of the Fed beige book later on.