US – No cuts in sight
US PMIs surprised strongly to the upside, with the composite reading at 54.4 versus expectations of roughly unchanged levels at 51.2. The beat was driven by the services sector, while manufacturing grew too. Employment continued to decline, but less strongly than in April and was partially driven by labour shortages. Prices pressures rose too, driven by manufacturing inputs like commodities but also higher wages. Markets correctly read the release hawkishly, as US 2y yields rose 6bp following the release. Earlier last week, Governor Waller said he required “several more” months to gain confidence that inflation was falling sufficiently to cut, while the Fed minutes pointed to various members ready to hike if needed. Accordingly, markets removed a July cut entirely from the distribution, and now only see an 80% chance for a rate cut by November.
Eurozone – Higher wages
The ECB’s Q1 negotiated wage tracker showed 4.7% YoY for Q1, rising from 4.5% in Q4-23 and beating analyst expectations. The surprise was driven by large bonus payments in Germany, which form an increasingly important part to German pay deals and therefore can’t be discounted entirely. The ECB’s blog expects wages to “remain elevated in 2024, and show a bumpy profile”, complicating the outlook of fast cuts by the ECB. The composite PMI rose from 51.7 to 52.3, beating forecasts into increasingly expansionary territory. The commentary was positive, describing an expanding services sector and an improving German manufacturing sector. This Friday’s HICP is expected to rise slightly, from 2.4 to 2.5% for headline, and from 2.7 to 2.8% for core. The increase is likely to be driven by a reversal of falling volatile items last month, and base effects resulting from the introduction of Germany’s subsidized train tickets last May.
UK – Elections ahead
Prime Minister Sunak surprisingly called for a general election on July 4th, earlier than late 2024 or early 2025 expected by most. The move was driven by better economic data (better GDP, falling inflation), less room for tax cuts, and declining expectations for BoE rate cuts this year. The Labour Party leads the Tories by 20 points in the polls, so an election victory seems all but clear, but we think it’s worth watching the polls closer to the date, as 20% of voters are still undecided and a lot will hinge on voter turnout too. We expect the fiscal stance of any next UK government to stay relatively unchanged, but election uncertainty may add to UK risk premia for the duration of the campaign.
Algebris Investments’ Global Credit Team
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