And Then There Were Four

June 06, 2024

And Then There Were Four

  • ECB is expected to deliver a hawkish cut later today, becoming the fourth G10 central bank to ease this year.
  • Encouraging US economic activity and rising expectations for looser Fed policy triggered a risk-on sentiment in financial markets.
  • Australia lending data was strong and reinforces the RBA’s patient guidance before easing.

USD and Treasury yields edged lower despite faster US services sector expansion. The ISM services index increased more than expected to a nine-month high at 53.8 (consensus: 51.0) driven by higher business activity, faster new orders growth, and slower supplier deliveries.

The market narrative is the Fed will look through stronger US services sector growth momentum and follow other major central banks (SNB, Riksbank, BOC and ECB) in easing policy this year. In fact, Fed funds futures raised odds for 50bps of cuts by end 2024. The combination of encouraging US economic activity and rising expectations for looser Fed policy has triggered a risk-on sentiment in financial markets with global equity markets up.

In our view, the bar for the Fed to shift to a less restrictive stance is higher than currently anticipated by financial markets. US core services (less housing) inflation is too high at almost 5% y/y and the labor market is cooling but remains strong. Tomorrow’s US May non-farm payrolls print will offer more details about the state of the job market. Today, the May Challenger job cuts (12:30pm London) and weekly jobless claims (1:30pm London) are the highlights.

The European Central Bank (ECB) policy rate decision takes the spotlight (1:15pm London). The ECB is widely expected to cut the key interest rate 25bps to 3.75%. However, the tone of the post-meeting press conference (1:45pm London) and the updated macroeconomic projections will likely dampen expectations the ECB is about to embark on an aggressive easing cycle. Indeed, Eurozone services inflation remains sticky above 4% y/y and leading indicators point to a modest improvement in economic activity. A hawkish ECB cut can offer EUR additional support.

GBP/USD is firm around 1.2800. The Bank of England releases its decision maker panel (DMP) survey today (9:30am London). 1-year expectations are expected to drop a tick to 2.8%. If so, it would be the lowest on record since this series began in 2022 and would move closer to the 2% target.

JPY ignored dovish comments by Bank of Japan (BOJ) Board Member Toyoaki Nakamura. Nakamura noted it was appropriate to maintain current monetary policy settings for the time being as he’s still not confidence about the sustainability of wage growth. Nakamura is a staunch BOJ dove, so his comments are not surprising. Nakamura voted against normalising policy in March.

AUD/USD traded near the top-end of its three-week 0.6580-0.6700 range and NZD/USD rallied briefly to a three-month high above 0.6200 on positive risk sentiment. In Australia, lending data released overnight was strong and reinforces the RBA’s patient guidance before easing. The value of new housing loans commitments rose more than expected in April to 4.8% m/m (consensus: 1.5%) following a 3.8% increase in March. The increase in the value of new home loans was driven by owner-occupier (4.3% m/m) and investors (5.6% m/m).

In New Zealand, building activity plunged 4% q/q in Q1, the biggest quarterly decline since Q3 2021. Nevertheless, the drag on the economy from construction investment in Q1 is expected to be more than offset by the pick-up in consumer spending and higher terms of trade. Q1 GDP is released June 19. Q1 manufacturing activity is up next (11:45pm London).

USD/CAD retraced all its post Bank of Canada (BOC) meeting gains. Yesterday, the BOC cut the overnight rate 25bps to 4.75% and noted “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate”. Still, BOC Governor Tiff Macklem warned the easing path will be gradual and data dependent. Overall, monetary policy divergence supports the downtrend in CAD versus AUD, NZD, and NOK. Unlike the BOC, the RBA, RBNZ and Norges Bank are in no rush to loosen policy.

 

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