A Hawk Among Doves

June 10, 2024

A Hawk Among Doves

  • USD has bounced-back underpinned by widening monetary policy divergences. We expect the Fed to deliver a hawkish hold Wednesday.
  • EUR and French bonds underperform following the outcome of the European Parliament elections.
  • Sweden’s economy shrinks in April. Norway’s May CPI report was mixed.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is flexing its muscles underpinned by widening monetary policy divergences. The resilient US job market and strong services sector growth momentum suggest the Fed will not be in any rush to loosen policy. In fact, we expect the Fed to deliver a hawkish hold Wednesday. In contrast, other major central banks have started easing. Both the Bank of Canada and European Central Bank (ECB) slashed interest rates last week.

Following Friday’s stronger-than-expected non-farm payrolls report, Fed funds futures pushed-out the pricing of a first rate cut from September to November and trimmed the probability of two rate cuts in 2024 from almost 100% to 72%. The New York Fed’s May inflation expectations survey is today’s data highlight (4:00pm London).

EUR is underperforming following the outcome of the European Parliament elections. As polls suggested, the nationalist/populist parties [Identity and Democracy (ID) and the more moderate European Conservative and Reformists (ECR)] made important gains and could play kingmakers in the new parliament. This could complicate or delay the progress towards deeper Eurozone integration.

Regardless, it may take weeks before political alliances are shaped and a centrist “super grand coalition” remains the most likely scenario. The centre-right European People’s Party (EPP) are still the parliament's biggest group followed by the centre-left Socialists and Democrats (S&D), and the centrist Renew Europe (RE).

French President Emmanuel Macron’s decision to call snap legislative elections on June 30 with a second round on July 7 reflects his party’s trouncing in the European Parliament elections. France’s hard right National Rally (NR) party came out on top, and the likelihood is they replicate this win in the French National Assembly in the upcoming legislative elections. If so, Macron would become a lame-duck president with three years left to his term. The ECB’s policy outlook will remain a bigger driver of EUR than the Eurozone’s political landscape. As such, ECB/Feb policy divergence can further weigh on EUR/USD.

NOK ignored Norway’s mixed May CPI report. Annual headline CPI inflation slowed more than expected to 3% (consensus: 3.3%, prior: 3.6%) due to lower electricity prices. However, annual underlying CPI inflation was sticker than expected at 4.1% (consensus: 3.9%, prior: 4.4%) reinforcing the Norges Bank’s guidance that a tight monetary policy stance may be needed for somewhat longer than previously envisaged.

SEK weakened slightly following Sweden’s poor April GDP print. Real GDP fell 0.7% m/m after shrinking 0.4% in March on declining household consumption and private sector production. Weak economic activity supports the Riksbank’s guidance to cut the policy rate two more times during the second half of the year. Bottom line: NOK/SEK has scope to edge higher on diverging Norges Bank/Riksbank policy rate outlook.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction