• The global divergences continue to widen; data highlight will be the jobs report; U.S. growth remains solid; Canada data highlight will also be the jobs report; the ruling Morena party vowed to push ahead with controversial reforms; Mexico reports May CPI
  
• ECB delivered the widely expected 25 bp rate cut; Lagarde maintained a hawkish tone in her press conference; after the decision, the usual hawkish leaks appeared; ECB officials are spreading the cautious message today; Germany reported mixed April IP and trade data
  
• New Zealand reported soft Q1 manufacturing activity; China reported mixed May trade data; India kept rates steady at 6.5%, as expected

The dollar is trading sideways ahead of the jobs report. DXY is trading flat near 104 and has been rangebound between 104-105 since mid-May. Jobs data today will likely determine whether that floor holds. The euro is trading flat near $1.0890 in the wake of the widely expected “hawkish cut” by the ECB (see below), while sterling is trading flat near $1.28. The yen is trading slightly lower near 155.50. Despite the recent mixed 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, while the ECB rate cut yesterday (see below) underscored the widening monetary policy divergences that support the U.S. dollar. We remain positive on the dollar.

AMERICAS

The global divergences continue to widen. The ECB joined the ranks of the central banks that are front running the Fed, joining the SNB, Riksbank, and the Bank of Canada. The policy divergences reflect economic divergences, and therein lies the story behind what is being called a “hawkish cut” by the ECB (see below). We believe that the underlying message from the ECB is that it is growing concerned about the growth outlook. How else can one explain the start of an easing cycle at the same time that the bank raised its inflation forecasts? While the eurozone data have improved, the recovery (like the downturn) is likely to be shallow and apparently needs some goosing by the ECB. We note that headwinds from China (Germany’s largest export market) are likely growing. While the ECB is pushing back hard against an aggressive easing cycle, we believe it has begun even as the Fed holds steady.

Data highlight will be the jobs report. Bloomberg consensus sees 180k jobs added vs. 175k in April, while its whisper number stands at 167k. ADP came in soft at 152k vs. a revised 188k (was 192k) in April. However, it’s worth noting that before the April miss, NFP had outperformed ADP eight straight months. The unemployment rate is expected to remain steady at 3.9%. With the supply of workers and the demand for labor coming into better balance, 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.

The jobs report will help solidify market expectations ahead of the FOMC meting next week. Before the blackout, Fed officials all stayed on message about being patient and so the market sees the first cut coming in November.

U.S. growth remains solid. Atlanta Fed's GDPNow model is now tracking Q2 growth at 2.6% SAAR, up from 1.8% previously. Next update comes today after the data. NY Fed's Nowcast model is tracking Q2 growth at 1.8% SAAR and will also be updated today, along with its first estimate for Q3.

Canada data highlight will also be the jobs report. Consensus sees a 22.5k rise in jobs after a strong gain of 90.4k in April. The unemployment rate is expected to rise a tick to 6.2% on a higher participation rate of 65.5%. Hourly wages are expected to slow a tick to 4.7% y/y.

MXN weakened sharply yesterday after the ruling Morena party vowed to push ahead with controversial reforms. Morena’s leader in the lower house Ignacio Mier said lawmakers will soon start discussions with an eye on voting on the reforms when the new Congress is seated in September. Morena won a supermajority in the lower house but fell short of one in the Senate. However, Morena could still pull in enough support from other parties to pass the controversial reforms. Some of those, such as increased pension payouts and minimum wage hikes, could potentially lead to expensive social welfare spending. However, a looser fiscal stance suggests interest rates will remain among the highest in the EM FX universe and supportive of MXN. Indeed, the peso has recovered somewhat today.

Mexico reports May CPI. Headline is expected at 4.83% y/y vs. 4.65% in April, while core is expected at 4.29% y/y vs. 4.37% in April. If so, headline would accelerate for the third straight month to the highest since January and further above the 2-4% target range. At the last meeting May 9, the central bank kept rates steady at 11.0% and raised its inflation forecasts. It now sees inflation reaching its 3% target in Q4 2025 vs. Q2 2025 previously. Next meeting is June 27 and if the peso continues to weaken, inflation risks would rise, and another hold is likely then. The swaps market is pricing in 100 bp of further easing over the next year.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank delivered the widely expected 25 bp rate cut. However, the ECB took a hawkish tone as it emphasized that it “is not pre-committing to a particular rate path” and warned “it will keep policy rates sufficiently restrictive for as long as necessary to achieve” its 2% inflation target. At the same time, the ECB raised its headline and core inflation projections for 2024 and 2025, noting “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.” The ECB also lifted its 2024 GDP growth forecast to 0.9% from 0.6% previously.

President Lagarde maintained the hawkish tone in her press conference. She said the next few months would be “bumpy” and added that the speed and timing of rates cuts will be determined by the data. Lagarde also acknowledged that one ECB governor objected to a cut, and Robert Holzmann (the most hawkish member on the council) later admitted it was him. Holzmann said today that he wanted to send a signal with his dissent that the ECB hasn’t conquered inflation yet and added that inflation risks currently outweigh growth risks.

After the decision, the usual hawkish leaks appeared. Reports emerged that ECB officials are “all but excluding” a July cut and that even September is open to question. The market now sees around 75% odds of a 25 bp cut September 12, followed by around the same the same for another cut December 12. In our view, the ECB has room to deliver those cuts because eurozone inflation is in a firm downtrend and the recovery in economic activity remains subdued. Bottom line: the euro relief rally will be limited. With the Fed likely to deliver a hawkish hold next week, the monetary policy divergences will continue to widen.

ECB officials are spreading the cautious message today. Muller said, “The central bank needs to make its decisions rather cautiously and not to rush too much with cutting the interest rate.” Makhlouf said “We’re now confident that the disinflation process is working. It doesn’t mean, incidentally, that we know how fast we’re going to carry on or if at all because - this is the phrase we’ve been using - ‘the road is bumpy.’” Schnabel said, “As the future inflation outlook remains uncertain, we cannot pre-commit to a particular rate path.” Lagarde speaks later today, and her message will likely be quite predictably cautious.

Germany reported mixed April IP and trade data. IP came in at -0.1% m/m vs. 0.2% expected and -0.4% in March. In y/y terms, IP came in at -3.9% vs. -3.0% expected and a revised -4.3% (was -3.3%) in March. Elsewhere, exports came in at 1.6% m/m vs. 1.1% expected and a revised 1.1% (was 0.9%) in March, while imports came in at 2.0% m/m vs. 0.5% expected and a revised 0.5% (was 0.3%) in March. In y/y terms, export and import growth picked up to 1.9% and -0.6%, respectively. Overall, the trade data point to an ongoing recovery in both domestic and external demand.

ASIA

New Zealand reported soft Q1 manufacturing activity. Volume came in at -0.4% q/q vs. a revised -0.7% (was -0.6%) in Q4. Retail sales unexpectedly rose 0.5% q/q in Q1 and so it will be interesting if manufacturing activity fully offsets it. If not, GDP (due out June 20) could grow for the first time since Q2 2023.

China reported mixed May trade data. Exports came in at 7.6% y/y vs. 5.7% expected and 1.5% in April, while imports came in at 1.8% y/y vs. 4.3% expected and 8.4% y/y in April. Exports were the strongest since January, but China cannot rely on exports alone to sustain a recovery in economic activity and needs to instead stimulate domestic demand. Here, the softness in imports suggest domestic demand remains weak.

Reserve Bank of India kept rates steady at 6.5%, as expected. The RBI raised its real GDP growth projections but made no changes to the inflation forecasts. Nonetheless, the voting split suggests the bar to loosen policy is falling. The vote was 4-2 to keep rates on hold versus 5-1 in April. Goyal joined Varma in voting for a 25 bp cut. The swaps market is pricing in steady rates over the next six months followed by the start of an easing cycle over the subsequent six months as inflation falls towards the mid-point of the RBI’s 2-6% target range.