The US dollar is a little stronger against the euro and sterling, but is consolidating yesterday's gain against the yen that had lifted it to a 12-day high and returned it above the 200-day moving average. The inability of US Treasury yields to maintain the rise above 2.65%-2.67% denied the greenback its necessary fuel.
While US jobs growth was strong, key details like earnings and part-time work are still consistent with the kind of slack in the labor market that argues against a change in the Fed's path. Moreover, at the same time, the absence of stronger wage growth suggests inflationary pressures remain subdued. Just as headline inflation tends to converge to core inflation, core inflation tends to converge with wage inflation.
Nevertheless, as we anticipated, the combination of strong auto sales and jobs report will boost investors' confidence that the unexpectedly poor Q1 GDP was a bit of a fluke and not an indicator of the underlying economy. Even with little increase in earnings, the fact that in Q2, the US economy added nearly 820k jobs will help underpin consumption. The US economy appears to be tracking something around 3% growth this quarter. The risk is on the upside, and emanates from residential investment and inventories.
The ECB put some flesh on the bones of its Targeted LTRO plan (TLTRO), and the door to a technical adjustment in rates was kept ajar. Although Draghi suggested the TLTRO facility may provide as much as 1 trillion euros in funding, we remain less sanguine about the ultimate take-up. The fact that member banks can pool their TLTRO efforts is an interesting twist. It seems similar to carbon credits that one with excess can be "shared" with one that does not have enough. This would seem to benefit smaller banks.
We are intrigued by the procedural changes that Draghi announced. These include a move to fewer policy-making meetings (every six weeks, rather than every month), a reserve period that matches it (which may help reduce the amplitude, while lengthening the cycle of EONIA) and the introduction of some report (minutes) of the meetings. The linkage between these issues was not discussed in a satisfactory way by Draghi. Nor is the connection with the rotating voting scheme that will also be introduced next year very clear. Yet, in terms of how the ECB operates, these are among the most important changes since the establishment of the ECB.
There are three developments today that are worth noting. First, following the 4-2 vote at the Riksbank, which saw the Governor and First Deputy outvoted in favor of a 50 bp rate cut, Sweden reported dismal data today. Industrial production collapsed 3.2% in May, offsetting in full the revised 2.8% increase in April (from 3.0%). The Bloomberg consensus had forecast a 0.1% increase. The May manufacturing PMI did slip to 54.1 from 55.5 in April, but this was not a sufficient tell for the decline in industrial output that was reported. Adding insult to injury, industrial orders slid 2.2%, following the 1.3% decline in April.
The krona is trading softer, but well within yesterday's wide range. The euro reached a high yesterday of almost SEK9.39, and backed off to almost SEK9.28. While the Riksbank's action and the threat of more action will likely weigh on the krona going forward, in the near-term, some consolidation may be needed technically, as the euro is above the top of its Bollinger Band (~SEK9.2945). Perhaps dollar bulls will find more satisfaction selling the krona rather than the euro going forward.
Separately, the Swedish Finance Ministry announced it was shaving this year and next year's growth forecasts. This year's forecast was reduced to 2.5% from 2.7%. Growth next year was cut to 3.1% from 3.3%.
Second, the IMF cut is forecast for French growth this year to 0.7% from 1.0%. This is now more aligned with the market expectations. The Bloomberg consensus is for 0.75% growth this year. The IMF warned that it might take years for France to escape its economic malaise. Given the divergence between the economic performance of France and Germany, one might expect the interest rate spreads to reflect this. In this light, we note that Germany's Schaeuble noted that the German economy may surpass the 1.8% and 2.0% GDP forecasts for this year and next, respectively.
However, we are under the impression that the large pools of capital, such as central bank reserve managers, would prefer bunds, but there simply is not enough relative to demand. There is also a belief that Germany would not force France to seek international assistance. Therefore, what follows from these points is the perception that French bonds are a somewhat higher-yielding bund. That said, we will continue to monitor the Bund-Oat spread for any change in this "world-view."
Third, German factory orders fell 1.7%, which is half again as much as the market had expected. This, coupled with the downtick in the manufacturing PMI warns of downside risks to the 0.2% forecast in industrial production. The May report is due Monday. Of note, though factory orders from the euro area itself rose 5.7%, after a 9.0% increase in April. This would seem to have trade implications, but it also suggests a rise in investment in the euro area. Foreign orders outside of the euro area fell 5.2%. Domestic orders slipped 2.5%.
Lastly, we note that European bonds firmed, but stock markets mostly saw modest losses. The MSCI Asia Pacific Index consolidated its recent gains and remained near the year's high. The MSCI Emerging Equity Index edged to new highs for the year.
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