Fed – None the wiser
The US labour market data last week presented a mixed picture. While NFP/ADP employment and job openings rose, there were declines in the quits rate and average hourly earnings. Additionally, the unemployment rate showed a slight increase. As highlighted by Nick Timiraos from the WSJ in a recent tweet, it’s a “pick your narrative”-type of outcome, and we think Powell leans to the dovish side. On the other hand, some Fed speakers, including voters Jefferson and Harker, have pushed for a narrative this week which includes skipping June and hiking again in July, which the market now follows to price 9bp and 13bp respectively. While we understand that this tactic is intended to maintain a “higher for longer” market pricing, we are inclined to believe that the Fed is is still more likely done here than not. The Fed now enters the black-out period, and the only major data point will be CPI on 13th June.

Eurozone – Getting closer
Last week’s Eurozone inflation print fell substantially compared to the previous month, surprising consensus forecasts to the downside: the year-on-year headline Consumer Price Index (CPI) now stands at 6.1%, down from the previous 7%, and most importantly core inflation fell from 5.6% to 5.3% YoY. The core decline was broad-based, driven by declines in both goods and services. However, around 10 basis points of the decline can be attributed to the introduction of a subsidized train ticket program in Germany. Following this, in a slightly more hawkish speech, Lagarde mentioned that inflation momentum remained high, but we think this print is constructive and takes some pressure off the ECB. The terminal rate is priced around 3.75%, which we think is reasonable.

Algebris Investments’ Global Credit Team