Peace hopes in Middle East this morning
A peace deal in the Middle East looks closer this morning after Israel and Lebanon agreed a ceasefire. The situation is very volatile as, yesterday, peace seemed very far away after new clashes between Iran and the US which depressed sentiment and sent 0il prices higher, bond yields rose, equities were weaker, while the dollar strengthened. Brent crude was up 1% to $97/barrel – and was above $98 at times – while WTI was up 2% to $96/barrel. The news this morning is helping reverse some of those moves. The dollar gained some ground on the euro, dipping below $1.16 at times though up at $1.1610 currently, and is at $1.3430 to sterling with EURGBP again more or less unchanged at 86.4p.
Government bonds faced renewed weakness again yesterday, with yields rising across the curve both in the US and Europe, with yields rising by a few bps more, in general, in Europe than in the US. German 10-year yields were up 6bps, back above 3% to 3.03%, while French 10-year yields were up 8bps to nearly 3.7%. In the UK, 10-year yields were also up 7bps to 4.93%, while US 10-year yields were up 5bps to 4.5%. Again, the more positive sentiment this morning is seeing bond yields tick down from these levels this morning. US equities had what has been a rarity of late, a down day, with AI news unable to fully counter the worries about a further prolonged clash with Iran, and the S&P lost 0.7% for the day, while, in Europe, the Eurostoxx lost 0.9% and the FTSE lost 0.4%.
ADP employment showed private payrolls in the US rose 122,000 in May. This was slightly ahead of the consensus forecast, with April’s number revised slightly higher also, and the highest job gains since January. The lion’s share of job gains were in the services sector, accounting for 114,000 of new jobs. This is a positive indicator ahead of May’s non-farm payrolls due on Friday. The data continues to support a Fed position of staying on hold, leading to a probable rate hike sometime this year. Dallas Fed President Logan said the data indicates a broadly balanced labour market and she advocates higher rates later this year, while New York Fed President Williams said the job market ‘has stabilised’ and he sees no need to move rates up or down right now.
The Fed’s Beige Book shows a still growing US economy amid heightening concerns about the impact of the Middle East conflict. Economic activity increased at a slight to moderate pace in 10 of 12 districts, with the outlook showing little change in expected growth, and consumer spending remained mixed with middle- and lower-income consumers citing affordability pressure. Related to this, prices increased at a moderate to strong rate, with most districts reporting higher inflation pressures and an energy price shock from the Middle East conflict cited as the main risk to the economy. Overall, the tone of the book supports the market view that the Fed will remain on hold.
The OECD’s latest economic outlook sees slower global growth this year. World economic activity is now expected to increase by 2.8% this year, from 3.4% last year, with the persistent conflict in the Middle East dampening growth and pushing up inflation globally. The growth outlook for the US, at 2.0% this year and 1.8% next year, is significantly ahead of the Euro Area and UK, which are both expected to grow by just under 1% this year and by just over 1% next year. Although the report says the energy price shock should be ‘sharp but temporary’, the US is more exposed with a 3.7% PCE inflation rate expected this year compared to a Euro Area HICP rate of 2.8%. On this point, the OECD sees more room for the ECB to keep monetary policy looser compared to the Fed and BoE given the Euro Area’s comparatively lower inflation and weaker growth environment.
On the agenda today, we get Euro Area retail sales and the UK construction PMI. In the US, we have initial jobless claims and, here in Ireland, we get Q1 GDP. On the speaker front, BoE Governor Bailey and Fed members Daly, Bowman, Barkin and Schmid are scheduled to speak.