Euro under pressure
Political uncertainty is weighing on the euro this morning, after it also lost ground on Friday following stronger than expected jobs data in the US. The European Parliament elections over the weekend saw gains for far-right parties in some countries, including in France where President Macron has now called snap parliamentary elections after his party lost heavily to that of Marie Le Pen. EURUSD is trading at around $1.0750 this morning, down about 1.5 cents from just before Friday’s data, while EURGBP has fallen to £0.8455, its lowest level in almost two years. The pound is about a cent lower against the dollar post the US jobs numbers, trading just above $1.27.
The market pared back Fed rate cut expectations following Friday’s data, triggering a sharp rise in US bond yields with 2- and 10-year yields both closing around 15bps higher on the day (albeit 10-year yields still ended about 7bps lower on the week at just under 4.45%). German and UK yields followed some of the way higher, rising by 6-9bps. Meanwhile, French and Italian government bond yields particularly have spiked higher this morning following developments over the weekend, while European stocks are off more than 1% at the start of play today after shedding around 0.5% on Friday.
The US economy added 272k jobs in May, well ahead of the consensus forecast of +175k, following a slightly downward-revised gain of 165k in April, though the unemployment rate nudged up a touch to 4% from 3.9% the previous month. Wage growth was also firmer than expected in May, with average hourly earnings rising by 0.4% on the month and the year-on-year increase picking up to 4.1% from 4% in April.
Following last week’s interest rate cut, ECB President Lagarde has warned that “there is still a long way to go until inflation is squeezed out of the economy“, adding that the central bank will “still need to have our foot on the (interest rate) brake for a while, even if we are not pressing down as hard as before” (suggesting further rate cuts will come relatively slowly).
Looking to the week ahead, the Fed begins a two-day monetary policy meeting tomorrow, while the latest CPI report in the US is released a few hours before the conclusion of the meeting on Wednesday. The consensus expects core inflation to have nudged down for a second consecutive month in May (to 3.5%), an outturn that would reassure the Fed. However it wouldn’t be enough to change the message the Fed has been conveying since March, which is that it doesn’t expect to lower interest rates until it has “gained greater confidence that inflation is moving sustainably towards 2%.” In this regard, of particular interest will be whether the Fed’s updated “dot plot” continues to point to 75bps of rate cuts this year, or is lowered to something closer to what the market is now pricing in, which is just over 30bps, down from 45bps before Friday’s jobs data.
As well as the US CPI report, other economic data due this week include the latest labour market report in the UK tomorrow; Euro area industrial production on Thursday; and consumer confidence and inflation expectations in the US on Friday.