Good morning,
In a peculiar turn of events, South Korea has accused North Korea of launching over 150 balloons filled with “filth and garbage” across the border. Among the debris were bags purportedly containing animal waste, adding an extra layer of hostility to the already tense relations. North Korea’s vice-defence minister warned of this retaliation, clearly taking the phrase “sending a message” to a whole new, unsanitary level. South Korean citizens have been advised to keep an eye out for Pyongyang’s airborne “gifts.”
Last Week
A tepid US bond auction last week saw risk appetite switch off, sending the dollar higher and stocks lower. The global bond sell-off intensified on Wednesday after lukewarm demand for a new seven-year Treasury note auction. Treasury yields surged to their highest levels in a month, dragging down the Nasdaq Composite by 1.1%—its biggest drop since April. The S&P 500 also fell by 0.6%, though the small-cap Russell 2000 bucked the trend with a 1% gain. Amid this market turbulence, the dollar rallied, clawing back some of its most recent losses. Meanwhile, Donald Trump’s hush money trial and subsequent guilty verdict dominated headlines. As the presidential campaign now ramps up, uncertainty will increase in the financial landscape and volatility – after a period of relative quiet – will likely return.
Sterling edged to a 21-month high against the euro early last week, buoyed by stronger price pressures in the UK compared to the Eurozone. This shift prompted investors to factor in a divergence in interest rate policies. The pound moved close to 1.18 on Wednesday, its highest since August 2022. Bank of England policymakers’ inactivity until the July election further diminished the likelihood of imminent rate cuts, supporting sterling. Meanwhile, ECB chief economist Philip Lane suggested potential rate cuts in June, though hotter-than-expected inflation across the bloc on Friday tempered these expectations. The euro closed the week stronger, pulling back 0.3% against the pound and maintaining the 1.1750 resistance level intact since August 2022.
Pressure is mounting on the People’s Bank of China (PBoC) to devalue the renminbi as traders bet that the significant gap in borrowing costs between the US and China will drive more investors to sell the Chinese currency. Despite maintaining a strong yuan policy with a narrow trading range of 7.09 to 7.11 against the US dollar, the renminbi has recently traded up to 2% below this reference rate—the maximum allowable variation—indicating significant selling pressure. With US 10-year Treasury yields at 4.57% compared to China’s 2.3%, capital is flowing towards higher-yielding markets. Traders anticipate a potential one-off devaluation, reminiscent of the 2015 move that triggered market turmoil and severe capital outflows.
This Week
The European Central Bank is poised to cut rates at its June meeting on Thursday, potentially lowering its deposit rate by 25 basis points to 3.75%. This move would further widen the gap with the US Fed’s rate, currently at 5.25%-5.50%. Despite rate cut speculations, the euro has rebounded, buoyed by an improving economic outlook across the euro area. However, inflationary pressures remain, complicating the ECB’s decision on how quickly to ease policy. Investors anticipate at least one more 25-bps cut post-June, though some dovish policymakers may push for more. ECB President Lagarde’s comments at the press conference will be crucial, as any indication of slower rate reductions could see the euro surge above $1.09.
As the Fed grapples with inflation stubbornly near 3.0% instead of the 2% target, all eyes are on the upcoming nonfarm payrolls (NFP) report and ISM PMIs for valuable insights. Despite a tight labour market and robust consumer spending, recent signs suggest a cooling jobs market and cautious consumers. In April, the US added 175k jobs, a marked slowdown, with unemployment inching up to 3.9% and moderating wage growth. If this trend continues in May, it could bolster hopes for a Fed rate cut in 2024. Meanwhile, the ISM manufacturing and services PMIs, factory orders, JOLTS job openings, and the ADP employment report will provide crucial updates on business momentum and price pressures. Without clearer data, the US dollar may continue trading sideways.
Key Events
Monday June 3rd
14:45 US Manufacturing PMI
Tuesday June 4th
07:30 Swiss CPI
15:00 US Jolts Job Openings
Wednesday June 5th
02:30 Australian GDP
13:15 US Non-Farm Employment Change
14:45 Canadian Employment Rate
15:00 US Services PMI
15:30 BOC Press Conference
Thursday June 6th
13:15 Euro Monetary Policy Statement
13:30 US Unemployment Claims
13:45 ECB Press Conference
Friday June 7th
13:30 Canadian & US Unemployment Rate & US Average Hourly Earnings
Have a great week,
The Garton Team.