ECB Preview – All clear for a June rate-cut
The ECB will likely pave the way for their first rate cut in June, following weaker Eurozone inflation last week. Headline HICP fell from 2.6% to 2.4%, while core fell from 3.1% to 2.9%. Both numbers missed expectations by 0.1%, and were mainly driven by food, energy and non-energy goods disinflation. Services inflation has been sticky at 4% over the past five months, so the ECB will require further data before the June meeting, most importantly the Q1 wage estimate to be released on May 23rd. For this Thursday’s meeting, no new projections will be available, and we expect the statement to change only slightly, while Lagarde may speak more openly about the prospects of rate cuts during the press conference.

Geopolitics – Israel/Iran tensions spark risk-off fears
The tensions between Israel and Iran are increasing, following Israels alleged attack on senior Iranian military commanders in the Iranian embassy in Syria last week. Iran is unlikely to see direct confrontation, but signalled retaliation strikes, likely through backing allies like Hezbollah. Netanyahu stated Israel would respond accordingly, causing risk markets to sell off and safe-haven assets to rally last Thursday evening. The US claims they were unaware of the attack on the embassy, while Biden linked further US support to improving humanitarian conditions in Gaza. This puts additional pressure on Israels government which already suffers under low domestic popularity of Netanyahu. Brent oil prices reached 90$ on the escalation, only 5$ below September 2023 highs – an increasing concern for risk markets and inflation forecasters.

US Economy – Strong jobs but Fed watches inflation
Fridays’ NFP print surprised with a blockbuster 303k, much above the 214k estimate and rising from last month’s 275k. The unemployment rate fell from 3.9% to 3.8%, but average hourly earnings fell from 4.3% to 4.1% YoY. Job growth remains strong in the US amid high immigration, which therefore shouldn’t be inflationary. The Fed remains cool about stronger labour markets, while hoping for lower inflation this week to keep rate cuts for this year on the table. The known-hawk Kashkari questioned last week if cuts were needed at all in 2024, but even post Friday’s print the markets baselines remain at around 3 cuts, with declining chances for a start in June. Pressure lies on Wednesday’s CPI number to come in low, with economists forecasting 0.3% MoM for headline and core inflation, 0.1% below last month’s prints.

Algebris Investments’ Global Credit Team