The Morning Hark - 6 June 2024

Today’s focus...Dovish BoC but don’t expect the same from the ECB.

Overnight Highlights

Prices are at 6.45 BST/1.45 EST, with changes reflecting movement from midnight GMT

Oil - Oil up smalls in Asia with Brent and Crude August futures currently at 78.80 and 74.20. Oil continues to have the hangover of the OPEC+ decision, to unwind supply cuts later this year, still hanging over it and despite the lower rate environment gains have been muted.

EQ - Asian equity markets flat overnight with the Hang Seng and Nikkei futures trading at 18,315 and 38,765 respectively.

The US indicies however continue to gain overnight after hitting all time highs in the S&P and Nvidia hitting $3tn market cap. The S&P and Nasdaq futures now at 5365 and 19,090 respectively.

Gold - Gold up smalls in Asia with the August futures trading currently at 2388.

FI - US yields stabilising a touch overnight, after the dovish BoC got the rates market excited, with the US2y futures trading at 4.74% whilst the US10y futures yield at 4.29%.

European yields closed lower following the US with the German 10y closing at 2.51% and the Italian 10y yield at 3.81%.

UK gilt 10y at 4.18%.

FX - The USD flat in Asia after what have been fairly muted sessions of late. The USD Index currently at 104.18. The majors now trading at; JPY, EUR and GBP 155.95, 1.0885 and 1.2790 respectively.

Today’s major FX option expiries sees in USDJPY $1.5bn at 155.45. In the EUR we see €2.3bn at 1.09 and a further €1.7bn at 1.0915.

Others - Bitcoin and Ethereum enjoying the lower rate chatter with the the pair currently at 70,900 and 3850 respectively.

Macro Themes At Play

Recap

Germany Services PMI Final May print shows a small uptick to 54.2, its best print in a year.

However May’s EU Services PMI Final print showed a tiny downward revision to 53.2.

The UK Services PMI remained in line at 52.9.

US ADP Employment Change for May came in below expectations at 152k. Its worst print in 4 months and also the previous month was downwardly revised.

Canada Services PMI for May much better than its manufacturing counterpart and well above expectations at 51.1. The best print, and indeed the first in growth territory, in a year.

US Services PMI Final print for May was bang in line at 54.8.

May’s US ISM Services PMI was strong strong. Headline at 53.8 was well above expectations and last month’s print. Indeed it was the best print since August however the underlying measures were mixed. Employment flattered to deceive at 47.1, a smidge below expectations although better than last month’s poor reading. New Orders came in much better than expected at 54.1 whilst Prices cooled at touch to 58.1. The real big driven was Business Activity which soared to its highest level since late 2022 although this was perhaps more due to a rebound after last month’s sharp dip.

BoC Review

Well they went and stole the ECB’s thunder and cut rates by 25bps to 4.75%.

The statement was brief with it a lot shorter than the previous meeting’s one. It does give a nod to “risks to the inflation outlook remain” but it ends with the bold statement that “recent data has increased our confidence that inflation will continue to move towards the 2% target”.

So Governor Macklem’s claim that he needed to see “months” of evidence actually was a month and a matter of days so I guess you could argue that was “months”. Anyway what was probably more important was that rather than the widely expected mildly hawkish rate cut we got a dovish steer.

He noted that the BoC is “not close to the limits” of divergence from the Fed. It stands at 75bps and from those words that divergence will only get wider.

Unusually he seemed rather calm about the obvious implications for CAD; “markets have a very good idea of what’s on our minds which is going to be reflected in markets”. So sell CAD I guess.

July looks a live meeting as he reflected that decisions will be made a “meeting at a time”. He added that “if the economy continues to evolve broadly as we expect then it is reasonable to expect further cuts in our policy rate but the timing of further cuts will depend upon incoming data”.

Around a further two cuts are priced in by the end of the year but the way Macklem was in his presser this looks undercooked. As for CAD, never the most exciting but 1.40 seems a reasonable target now.

ECB Preview

I attach the excellent RTTF ECB preview which also gives a demo of our AI research co-pilot.

Harkster ECB Preview (link)

The Day Ahead

Not much on tap of significance today other than of course the well trumpeted ECB Rate Decision/Cut.

Overnight we have the China Trade Balance for May.

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Main Highlights Ahead

All times in BST (EST+5 / CET-1 / JST-9)

The main highlights for the day ahead ahead in terms of data and speakers:

Thursday

Germany Factory Orders MoM Apr consensus 0.3% vs previous -0.4% (07.00 BST)

EU Retail Sales MoM Apr consensus -0.3% vs previous 0.8% (10.00 BST)

EU Retail Sales YoY Apr consensus 0.1% vs previous 0.7% (10.00 BST)

ECB Interest Rate Decision rates to be cut by 25bps to 4.25% (13.15 BST)

ECB Press Conference (13.45 BST)

Canada Ivey PMI s.a. May consensus 65 vs previous 63 (15.00 BST)

Early Friday

China Balance of Trade May consensus $73Bn vs previous $72.35Bn (04.00 BST)

China Exports YoY May consensus 6% vs previous 1.5% (04.00 BST)

China Imports YoY May consensus 4.2% vs previous 8.4% (04.00 BST)

Germany Industrial Production MoM Apr consensus 0.2% vs previous -0.4% (07.00 BST)

Good luck.

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