2024 Weekly Update

Market update

The S&P 500 closed the week at 5,346.99, +1.32% higher. The Dow Jones closed at 38,798.99, +0.29%, with the Nasdaq higher by +2.38%. The volatility index VIX closed the week at 12.22 down from 12.92. The Euro Stoxx 600 surged +0.65%.

The 10-year UST closed at 4.43% down from 4.50% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -97bps. US Corporate Bond spreads: Investment Grade spreads widened 5bps at 157bps and High Yield widened 6bps at 340bps. German 10-year Bunds yield closed at +2.62% down from +2.66% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 121bps and High Yield tightened 1bp at 327bps.

The US Dollar Index (DXY) appreciated +0.20% last week and closed at 104.88. The Euro closed at 1.0801 (-0.43%); the Yen appreciated +0.36%, closing at 156.75 and the Swiss Franc appreciated +0.63%, closing at 0.8966. Gold closed at $2,293.78 depreciating -1.44%. Oil was lower, Brent closed at $79.62 (-2.45%) and WTI at $75.53 (-1.90%).

Macroeconomy

US labor market

The US economy added 272k jobs in May according to the Establishment survey, a sharp jump from +175k in April and much higher than the +180k forecast. The number is also far above what the ADP survey showed earlier in the week. The March and April Establishment surveys were revised down by a cumulative 15k jobs. While the Establishment survey was strong, the Household survey showed a large drop in the number of employed people (down 408k) and because of this (and a lower participation rate), the unemployment rate rose to 4%. This is up from 3.9% in April and ahead of the 3.9% forecast. This is the first time the unemployment rate has had a 4 handle since Jan. 2022. The participation rate dropped 20bps m-o-m to 62.5%, down from 62.7%. Wages surged, climbing 0.4% m-o-m (vs. +0.3% consensus) and 4.1% y-o-y (vs. +3.9% expected and ahead of +4% in April). The workweek length was inline and unchanged m-o-m at 34.3 hours, down slightly from 34.4 hours in May 2023. Average weekly earnings came in at $1,197.41, up 3.8% y-o-y. Ahead of the jobs report, the US weekly initial jobless claims were a bit weaker than expected yesterday, rising to 229k over the week ending June 1 (vs. 220k expected). That’s a 4-week high. In the same lines, the ADP payroll numbers for May also undershot expectations, rising +152k (vs +175k expected), which is its slowest pace since the start of the year. Lastly, the April JOLTS report showed the openings rate came in at 8.06M (vs 8.35M expected), falling to its lowest level since Feb. 2021. The ratio of openings to unemployed workers fell to 1.2, its lowest level since July 2021. The private sector quits rate, which measures the number of people who voluntarily leave their job, came in at 2.4%, with the previous month also revised up to 2.4%. The revision confirms the series has been flatlining since the end of 2023, at its lowest level since 2020.

ECB rate cut

The ECB (European Central Bank) announced a 25bps cut in their deposit rate to 3.75%, which is the first cut they’ve delivered since 2019. The decision was widely expected, but there were several aspects that leant in a hawkish direction. For instance, they took out the line from the last statement that “it would be appropriate to reduce the current level of monetary policy restriction” if their confidence grew that inflation was returning to target. Moreover, they upgraded their inflation forecasts, with 2024 revised up by two-tenths to 2.5%, and 2025 also up two-tenths to 2.2%. On top of that, President Lagarde said: “are we today moving into a dialing back phase? I wouldn’t volunteer that”. So, investors grew more skeptical that this would kick off a rapid series of rate cuts. Even though the tone was a bit hawkish in several respects, it now makes the ECB the fourth G10 central bank to have cut rates, after Canada, Sweden and Switzerland.

Bank of Canada

The Bank of Canada (BoC) became the first G7 country to cut rates this cycle. They cut rates by 25bps to 4.75% as expected, and there was a dovish tone from Governor Macklem, who explicitly mentioned additional cuts, saying it was “reasonable to expect further cuts” if inflation continued to ease. Macklem also mentioned the BoC does not “need to move in lockstep with the Federal Reserve”, although “there are limits to divergence”. Markets are pricing a further 55bps of cuts this year.

US data

The Atlanta Fed’s GDPNow estimate for Q2 was upgraded again to an annualized rate of 2.6%. US trade deficit was a bit smaller than expected in April, at $74.6bn (vs. $76.5bn expected), even if the number was still the highest since Oct. 2022. US ISM services for May surprised on the upside at 53.8 (vs 51.0 expected). That was significant as the previous month had seen the index fall to a contractionary 49.4, so the bounce back suggests that was just a blip rather than the start of a more concerning trend. This reading was also the index’s highest level since last August, and the largest monthly increase since Jan. 2023. However, a few of the details weren’t quite as strong: the employment component was still in contractionary territory at 47.1 in May (vs 47.2 expected), and therefore in line with the wider narrative of a slackening labor market. The prices paid index fell back from 59.2 to 58.1 (vs 59.0 expected), as inflationary pressures came off a tad. The Manufacturing ISM headline survey fell back to 48.7 (vs. 49.5 expected), marking a second consecutive decline for the measure. The new orders subcomponent also fell to a 12-month low of 45.4 (vs. 49.4 expected). The one bright spot came from the employment numbers, which did hit a 21-month high of 51.1 (vs. 48.5 expected).

Rest of the world data

China's Caixin services PMI accelerated at the fastest pace in 10 months jumping from 52.5 in April to 54.0 in May on improving local and overseas demand. However, the private survey data contrasted with official PMI data released, which showed that services sector activity grew at a slower pace in May than April. Australia’s Q1 2024 GDP growth slowed to just +0.1% (v/s +0.2% expected) and slower than the revised +0.3% pace for the final three months of 2023. On an annual basis, the economy expanded +1.1% with markets expecting it to slow to +1.2% from a growth of +1.5% in the Q4 2023.

Highlights

On rates

Treasuries saw heavy selling pressure last Friday after the substantial upside surprise to the May nonfarm payrolls. 2-year yields gained 16.2bps closing the week at 4.89%, while 10 year yields rose 14.6bps to 4.43% (still -6.6bps lower on the week). Fed expectations moved in a hawkish direction after the data release, with the odds of a Fed cut by the 9/18 meeting falling to 55% (down from 85%). Investors now expect 37bps worth of rate cuts for the year, down from 49bps. In Europe, the strong US employment numbers pushed 10yr German bund yields up 7.0bps, adding to the 3.7bps rise the day prior following the ECB rate cut.

Indian elections

Modi will remain India’s prime minister for a third term despite his BJP losing its outright majority. BJP got 240 seats (down from 303 in 2019) vs the 272 needed for a majority. This came in as a big disappointment compared to exit polls that proved to be very inaccurate. Modi had to rely on allies to obtain a ruling majority. His BJP-led alliance National Democratic Alliance (NDA) won the election with 293 seats. While Modi continues to lead the country, he does so in a much uncertain environment than was expected. The loss of outright majority caused volatility to pick up in Indian equities (and Indian rupee). The Nifty 50 fell -6.45% on Tuesday after bouncing +3.64% to an all-time high on Monday.

What to watch

• Monday: Japan GDP (Q1)

• Tuesday: Japan PPI (May); US NFIB small business optimism (May)

• Wednesday: China CPI and PPI (May); US: CPI (May), Fed interest rate decision

• Thursday: Euro area industrial production (Apr.); US initial jobless claims, PPI (May)

• Friday: BoJ interest rate decision; US Univ. of Michigan consumer sentiment & inflation expectations (June)