Currently under consideration

The May PMIs are the focus of attention in the euro area. With a composite PMI above 50 over the previous two months, the economy has gotten off to a robust start in 2019. While the manufacturing sector is expected to show some improvement, perhaps reaching 46, the service PMIs are expected to stay around 53, suggesting deterioration. We will pay particular attention to the employment and services price indices, which are still high and present upside risks to domestic inflation. This could lessen the ECB’s desire to decrease interest rates in the second half of the year.

Additionally, we obtained the euro area’s Q1 2024 negotiated salaries. Expectations for inflation are well-anchored, and current data points to a slowdown in wage growth to about 4% in Q1. The handling of one-offs leaves the strong labor market and the Q1 print vulnerable to upside risks. Lastly, we also keep an eye on consumer confidence for May.

Additionally, we watch for PMIs from the UK and the US. In the evening, Atlanta Fed’s Bostic (voter) will be on the wires.

 

As per the consensus, we anticipate that Turkey’s central bank will maintain the policy rate at 50% today. CBRT should continue to exercise caution because headline inflation is still very close to 70% year over year and because underlying inflation is still growing at a robust monthly rate. The central bank has stated that additional tightening will occur should inflation significantly and persistently worsen, which is not the situation at this time.

Japan released its April inflation figures early on Friday. For a while now, inflation has been steady at between two and three percent, and monthly price increases have likewise perfectly matched the inflation target. Nonetheless, the pace did slow down in March, and Tokyo figures suggest that prices may rise somewhat further in April.

Economic and market news

What happened overnight

The manufacturing PMI in Japan was 50.5 in May, up from 49.6 the previous month. For the first time in more than a year, industry activity increased, according to this. The expansion is still being led by the service sector, notwithstanding its decline to 53.6 (from 54.3 previously).

What happened yesterday

According to the US Fed’s FOMC meeting minutes, officials expressed confidence that pricing pressures would abate in the upcoming months. Nonetheless, a few of officials stated that they would be open to raising borrowing prices once more if inflation spiked. The market reacted slightly hawkishly to the minutes, selling off some risk and seeing a general strengthening of the USD.

Following the close, Nvidia revealed better-than-expected Q1 revenue of USD 26.0 billion compared to an estimate of USD 24.69 billion. The company also raised its Q2 revenue projection, which caused the stock to rise by more than 5% after hours. Not, however, a knock-on effect on larger markets.

In the United Kingdom, In the UK, inflation in April came as a huge surprise overall, outperforming both the Bank of England‘s (BoE) projection and the mainstream estimate. Revenue increased by 5.9% year over year and by 2.3% for Headline. A wide range of services continues to be the key driver of the solid underlying momentum. Since the BoE utilizes service inflation as a gauge of inflation persistence, it is still important. It’s concerning that the trend in service inflation accelerated in April in addition to the significant BoE forecast failure.

 

We now anticipate the first 25bp cut in August (formerly June), following the top side surprise and the May print is unlikely to yield an equally substantial downside surprise to persuade the majority of the Monetary Policy Committee to vote for a cut. See Bank of England’s revised BoE call, “Hot service inflation spells trouble,” for additional information on May 22.

Similarly, UK Prime Minister Rishi Sunak, a Conservative, said that a quick general election will be held on July 4, 2024. Even though an October election was widely anticipated, we do not think the timetable will significantly alter the situation. Both surveys and prediction markets now indicate that the Labour Party will win by a majority, and markets have priced this in. With both parties adamantly campaigning on the promise of delivering economic stability and the chance of another incident akin to the “mini”-budget event being low, we estimate the overall market impact of the UK general election on July 4 to be quite subdued.

The Chinese government is contemplating raising import duties on gasoline-powered heavy vehicles to a maximum of 25%, in response to the intensifying trade tensions between China and the US and EU. China currently levies an import tax of 15% on these vehicles. An increase could hit German carmakers such as Mercedes and BMW, which exports such cars to China. The announcement caused their shares to fall by more than 2%.

Regarding China in particular, British Defence Minister Grant Shapps charged that China was giving or getting ready to give Russia deadly support in its conflict with Ukraine. The disclosure comes after Russian President Vladimir Putin met with Chinese President Xi Jinping for two days of discussions in China last week. We’ll keep an eye on China’s response to the charge.

Market fluctuations

Equities: In the absence of any noteworthy news to influence the markets yesterday, global equities declined. Notably, energy and materials also declined, with industrial metals falling precipitously and oil declining by 1.5%. Growth in tech and large-cap stocks did better, even beating Nvidia’s profits. The Dow dropped by 0.5%, the S&P 500 by 0.3%, the Nasdaq by 0.2%, and the Russell 2000 by 0.8% in the US yesterday. Asian markets are uneven this morning, with mainland China and Hong Kong’s stocks declining while Japan is leading the gains. Tech-related gains and responses to Nvidia’s earnings have driven up US futures. Though not as much as in the US, European futures are rising as well.

FI: Following the initial reaction to the unexpectedly strong UK inflation print in the morning, rates traded in a relatively narrow range, with the 10-year German yield closing at 2.53%, with very little difference to the other euro area jurisdictions. This caused the entire yield curve to shift upward by 2-3bps. This indicates that the French linker and the long-end supplies from Portugal (30y) and Austria (15y) were well-absorbed by the markets. The FOMC minutes, which were made public yesterday night, included the following: “Although monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness.” This information was mostly ignored by US markets.

FX: Following the FOMC minutes, the USD strengthened yesterday, with a final leg lower in the EUR/USD pair. Subsequently, the USD rally somewhat abated as EUR/SEK fell back towards 11.60 following Nvidia’s release of another solid performance and a constructive tone for stock futures. While EUR/NOK has been rather stable, NOK/SEK is still somewhat above parity and just below resistance levels. Following the UK inflation report, which surprised the upside and suggested the Bank of England may delay rate cuts, EUR/GBP fell precipitously along with relative rates.