• Yesterday’s risk off vibe is wearing off; data highlights will be ADP private sector jobs and ISM services PMI; April JOLTS data were mixed; BOC is expected to cut rates 25 bp to 4.75%; Canada reports some more May PMIs
  
• The two-day ECB meeting began today and will end tomorrow with a widely expected 25 bp rate cut; eurozone and U.K. reported final May services and composite PMIs; the first debate between Sunak and Starmer took place last night; Sweden reported firm May services and composite PMIs; Poland is expected to keep rates steady at 5.75%
  
• Japan reported solid April cash earnings and final May services and composite PMIs; Australia reported soft Q1 GDP data and final May services and composite PMIs; Caixin reported firm services and composite PMIs for May

The dollar is firm ahead of ADP and ISM. DXY is trading higher near 104.337 after briefly trading below 104 yesterday. The euro is trading lower near $1.0870 while sterling is trading flat near $1.2770. The yen is the biggest loser today as risk off impulses fade, with USD/JPY is trading back above 156 after trading below 155 for the first time since May 16. EM FX is mixed after the carry trade took a beating this week (see below). Despite the recent data, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have taken back the dovish Fed easing expectations. Of note, the Bank of Canada is expected to cut rates today (see below) and that will underscore the widening monetary policy divergences that support the U.S. dollar.

AMERICAS

Yesterday’s risk off vibe is wearing off. JPY and CHF are outperforming today while EM FX is getting some limited traction. Commodity prices are stabilizing, while global equity markets and global yields are largely higher. Yet the EM carry trade has taken a huge beating and the big question remains whether and when punters stick their necks out to reload these trades. MXN and INR are recouping some losses while ZAR remains under pressure. When all is said and done, it seems way too early to go long again now, especially ahead of Friday jobs data and FOMC next Wednesday. Carry trades typically thrive in a low vol, weak dollar environment and we are not getting there anytime soon with a hawkish Fed and monetary policy divergences that are widening.

Data highlight will be ADP private sector jobs. Consensus sees 175k vs. 192k in April. This comes ahead of Friday’s jobs report, where Bloomberg consensus sees 185k jobs added vs. 175k in April and its whisper number stands at 175k. The unemployment rate is expected to remain steady at 3.9%. With JOLTS data confirming that supply and demand for labor are coming into better balance (see below), the pace of wage growth will probably be a bigger driver of U.S. interest rate expectations. Average hourly earnings are forecast to rise 0.3% m/m vs. 0.2% in April and remain at 3.9% y/y.

ISM services PMI for May will also be important. Headline is expected at 51.0 vs. 49.4 in April. Keep an eye on prices paid, which is expected to fall two ticks to 59.0. Any drop would be a relief and would confirm the drop in prices paid in the manufacturing PMI to 57.0 vs. 60.9 in April. Elsewhere, employment is expected at 47.2 vs. 45.9 in April. Of note, S&P Global services PMI rose to a 12-month high of 54.8 in May and warns of some upside risks.

April JOLTS data were mixed. Job openings came in at 8.06 mln vs 8.360 mln expected and a revised 8.355 mln (was 8.488 mln) in March. This was the lowest since February 2021 and supports the notion that the labor market is loosening. Looking deeper at the data, we see underlying strength. Hires rose to 5.64 mln vs. 5.617 mln in March, while quits rose to 3.507 mln vs. 3.409 mln in March. What's most noteworthy is that layoffs fell to 1.515 mln vs. 1.601 mln in March, the lowest since December 2022. On a more negative note, the openings rate (openings divided by employment + openings) fell to 4.8% SA vs. a revised 5.0% (was 5.1%) in March. This is the lowest since January 2021 and is approaching the 4.5% level that typically points to a significant rise in the unemployment rate. Stay tuned, as we'll know more Friday. Ahead of that, May Challenger job cuts and weekly jobless claims will be reported tomorrow.

Bank of Canada is expected to cut rates 25 bp to 4.75%. However, the market is a bit split. Nearly a third of the 30 analysts polled by Bloomberg sees steady rates, while WIRP suggests nearly 80% odds of a cut. We think the BOC will deliver a cut. First, Q1 GDP growth of 1.7% SAAR undershot the BOC’s projection of 2.8% by a wide margin, while Q4 growth was slashed 0.9 ppts to just 0.1% SAAR. Second, inflation is slowing as annualized growth on a three-month basis for CPI core-trim and core-median tracked under 2% in both March and April. Third, labor market conditions have eased, as job creation has been slower than the increase in the working age population. The BOC will not release updated macro forecasts until the July 24 meeting.

Canada reports some more May PMIs. S&P Global services and composite will be reported. On Monday, S&P global manufacturing PMI fell a tick to 49.3. Ivey PMI will be reported tomorrow.

EUROPE/MIDDLE EAST/AFRICA

The two-day European Central Bank meeting began today and will end tomorrow with a widely expected 25 bp rate cut. However, the tone of the post-meeting press conference and the updated macroeconomic projections will likely further dampen expectations that the ECB is about to embark on an aggressive easing cycle. Eurozone services inflation remains sticky above 4% y/y and leading indicators point to a modest improvement in economic activity. Odds of a second hike in September and third hike in December are currently around 75%.

Eurozone reported final May services and composite PMIs. Both headline services and composite fell a tick from the preliminary to 53.2 and 52.2, respectively. Looking at the country breakdown, the German composite rose two ticks from the preliminary to 52.4 and the French composite fell two ticks to 48.9. Italy and Spain reported for the first time and their composite PMIs came in at 52.3 and 56.6, respectively.

The first televised head-to-head debate between Rishi Sunak and Keir Starmer took place last night. A poll by YouGov after the debate gave Sunak a narrow victory, 51% to 49%. Regardless, the Tories have consistently trailed in polls by around 20 percentage points since Rishi Sunak took over as prime minister in October 2022. This suggests ongoing fatigue with the Conservatives after 14 years in power. Please see our U.K. election primer here for more insights.

U.K. reported solid final May services and composite PMIs. Services was steady from the preliminary at 52.9, while the composite rose two ticks from the preliminary to 53.0. With the economic recovery progressing and inflation remaining sticky, the BOE is in no hurry to cut rates. The market sees 66% odds of a cut in September but becomes fully priced in for the November meeting.

Sweden reported firm May services and composite PMIs. Services came in at 49.5 vs. a revised 48.0 (was 48.1) in April, while the composite came in at 50.8 vs. a revised 49.1 (was 49.0) in April. Finance Minister Svantesson said “We have now entered a new phase. As we are about to leave the fight against inflation behind us, we have to focus on growing the economy so that we can satisfy Sweden’s large needs.” The Riksbank is leading the way after it started the easing cycle at the May 8 meeting. Next meeting is June 27, and the market sees only 20% odds of a follow-up cut then but becomes fully priced in for the August 20 meeting.

National Bank of Poland is expected to keep rates steady at 5.75%. The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” MPC members continue to stick to the message of no rate cuts before 2025. In our view, there is room for NBP to ease earlier. Indeed, the swaps market is pricing in a 25 bp rate cut over the next six months followed by another 25 bp cut over the subsequent six months. However, ongoing tension between the government and the central bank governor complicates the policy rate path projection. Governor Glapinski holds his post-decision press conference tomorrow. Minutes to the May 9 meeting will be released Friday. At that meeting, the bank kept rates steady at 5.75%.

ASIA

Japan reported solid April cash earnings. Nominal earnings came in at 2.1% y/y vs. 1.8% expected and 1.0% in March, while real earnings came in at -0.7% y/y vs. -0.9% expected and -2.1% in March. Scheduled earnings came in at 2.3% y/y vs. 1.7% in March, the fastest since October 1994. The rather modest pickup was due to the pay raises agreed upon during the Shunto spring wage negotiations. Recent data continue to suggest a modest tightening cycle from the Bank of Japan. A more pronounced increase in pay growth would lift Bank of Japan interest expectations in favor of JPY, but we haven’t seen it yet.

Japan also reported solid final May services and composite PMIs. Services came in at 53.8 vs. 53.6 preliminary, while the composite came in at 52.6 vs. 52.4 preliminary. The composite has risen three straight months to the highest since August 2023. While the survey readings have been improving, this has yet to translate into strong real sector data. As a result, we believe the BOJ will not raise rates at next week’s meeting.

Australia reported soft Q1 GDP data. Growth came in a tick lower than expected at 0.1% q/q vs. a revised 0.3% (was 0.2%) in Q4, while the y/y rate came in a tick lower than expected at 1.1% vs. a revised 1.6% (was 1.5%) in Q4.

Australia also reported soft final May services and composite PMIs. Services came in at 52.1 vs. 52.6 preliminary, while the composite came in at 52.5 vs. 53.1 preliminary. The composite has fallen two straight months to the lowest since February and confirms our suspicions that the recovery in mainland China is petering out.

Nevertheless, the RBA will look through the soft data as it’s more concerned with getting inflation down. Governor Michele Bullock emphasized again overnight that “inflation needs to be coming back down and be sustainably back in the band on the board’s timetable because if it’s not, we can’t remove the restrictiveness of monetary policy.” Recall that the May 6-7 meeting minutes showed policymakers considered raising the cash rate target. However, the market is not pricing in any more tightening. Next meeting is June 18, and the market sees around 33% odds of a cut then.

Caixin reported firm services and composite PMIs for May. Services came in at 54.0 vs. 52.5 expected and actual in April, which pulled the composite up to 54.1 vs. 52.8 in April. However, recent weakness in key industrial commodity prices suggests all is not well in China and so we put more weight on the weaker official PMIs reported last week.