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At first glance, EMU’s May PMI was closer to expectations. The headline index fell slightly to 53.3 from 54.1 (53.5 was expected) but still points to solid growth. The dichotomy between further contraction in manufacturing (45.8 to 44.6) and strong growth in services (56.2 to 55.9) continues. This divergence was also seen in pricing behavior. Average prices for goods and services rose at their slowest pace in 25 months, according to S&P Global. However, by historical standards, price increases remain high. The services sector, in particular, continues to report increased pricing power on the back of a recovery in demand, while product producers expect lower input costs and lower discount demand. Yet service sector input costs continue to rise significantly, often due to rising wage and salary costs. HCOB Chief Economist Cyrus de la Rubia concludes in a statement:The European Central Bank will have a headache with the PMI data. In fact, this is because sales prices in the service sector rose from the previous month. …. This upward trend is still being observed here, preventing central banks from suspending interest rates.‘. Even in a weakening industrial sector, companies continue to hire. As previously mentioned, his PMI at EMU didn’t come as a great surprise. However, a combination of healthy labor markets and continued price pressure in the services sector was enough to further extend the recent rally in core European and US bond yields. German yields are below their intraday highs but are still up about 2-3 basis points across the curve. U.S. Treasuries underperformed, with yields rising further between 5.5bps (2 years) and 2bps (30 years). This time higher yields and a more inverted (US) curve triggered a correction in global equity markets (-0.9% for Eurostox 50 and -0.4% for S&P). However, recent highs are still within range. At the end of this report, the US headline PMI was released at 54.50, higher than expected, with the services sector showing solid growth (55.1) while the manufacturing sector was in the 50 boom/bust level (48.5). ). The yield in the first reaction is slightly increased. Dollar trading has changed little.
In the foreign exchange market, Higher yields and risk-off favor the dollar, Even though negotiations on raising the debt ceiling have yet to yield any results. EUR/USD fell from the 1.0810 area and traded near 1.078. DXY has bounced back to near the recent high of the 103.63 area. Even though core yields have risen, yen losses are still negligible. Still, USD/JPY (currently 138.5) is trying to break out of resistance at 138.75, reaching its highest level in almost six months. Sterling had a somewhat erratic intraday pattern. The UK currency took a hit when the weaker-than-expected UK PMI (54.9 to 53.9 composite) was released. EUR/GBP surged to the 0.8715 area for a time, but the pound quickly recovered from its post-PMI decline as UK yields still rose faster than EMU yields. At Congressional hearings, Bailey largely reiterated his message for the policy meeting in May: more tightening is needed if inflation persists. EUR/GBP is currently trading in the 0.8695 area again, counting down tomorrow’s important April inflation data.
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of Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, has again lashed out at oil short sellers. “We’re going to get burned,” Bin Salman told speculators at the Qatar Economic Forum in Doha, referring to OPEC’s decision in April. The oil cartels then implemented a staggering production cut of more than 1 million barrels per day. Shortly after, Brent crude oil prices soared from less than $80 to around $87 a barrel. However, continued recession fears and tepid growth in China after the end of the zero-coronavirus eradicated these gains. At the same time, there are serious doubts as to whether some OPEC+ members, including Russia, will comply with the production cuts at all. The price of a barrel of Brent crude rose slightly following Bin Salman’s comments and now sells for about $77 a barrel. OPEC+ will meet on June 3-4.
The Central Bank of Hungary today proceeded with the rate-cutting cycle by lowering the overnight secured lending rate, the cap on the interest rate corridor, by 100 basis points to 19.5%. But a key decision was to also cut the overnight deposit auction (and de facto policy) rate from 18% to 17%. The base rate was kept at 13%, a level high enough to fight inflation and which we expect to remain so for the long term. The Central Bank of Hungary said it will continue the convergence of both rates as long as risk perceptions for Hungarian assets, especially the forint, continue to improve. MNBs are in favor of a cautious and gradual approach (100bps monthly cuts until September?!). Forint reacted calmly to today’s decision as the market had been pricing in a rate cut for some time. The forint is holding firm around €/forint 374.
