Global headlines aplenty but trends continue

For the fixed income fanatics amongst us, June was always going to be one for the books with all three of the major central banks meeting, elections, and continued data. Last week was a particularly eventful one, with the European Central Bank (ECB) widely expected to deliver their first rate cut in over a decade, European parliamentary elections, and non-farm payrolls in the US that came after a mini trend of somewhat slower economic data in the last few weeks. This week will be dominated by the Federal Open Market Committee (FOMC) meeting and the US Consumer Price Index (CPI) number. Market participants will closely scrutinize the new Federal Reserve (Fed) Summary of Economic Projections (SEP) that will contain the Fed’s updated dot plot.

Despite a hectic week, the news and headlines have not done much to alter our views. Government bonds remain in a relatively wide range that remains difficult to break either way, and with a lot more volatility than most people would like, as central banks remain 100% data dependent. The ECB kicked off the central bank proceedings and, as expected, they took the deposit rate down by 25 basis points (bps) to 3.75%. The fact that this first cut occurred while both 2024 and 2025 inflation projections were revised up from 2.3% to 2.5% and 2.0% to 2.3%, respectively, did prompt some questions to ECB President, Christine Lagarde, in the press conference. However, Lagarde responded that the ECB, through the continuation of ongoing trends, had increased confidence in ‘the path ahead’ and that the ECB can cut and still have a restrictive monetary policy rate – a notion that has been shared by central bank members globally.

It was made clear though that this was not a carte blanche to begin the cutting cycle and that instead the ECB would be data dependent going forward. Austrian central bank chief, Robert Holzmann, the only member of the ECB to vote against the cut, stated that he would ‘need more data to be sure on the inflation path’.  Although Lagarde said that there was a ‘strong likelihood’ more cuts would come, she also admitted that ‘there will be bumps on the road.’ Even though the rhetoric was somewhat more hawkish than expected, we do not think this was entirely unanticipated.

European parliamentary elections saw a huge win for the far right in France. This has led President Emmanuel Macron to call snap domestic elections as he announced that he ‘cannot act as if nothing had happened’ – a noble act until you realise that every job is on the line except his. While far right parties enjoyed pockets of success across the continent, it appears that they have not won enough to move the political dial too far, with European Commission chief, Ursula von der Leyen, claiming ‘the centre is holding’ - as we predicted in our blog last month. Notwithstanding the headlines, we conclude that the macro impact of the election is likely to be muted.

The week came to a close with the non-farm payrolls release on Friday. The report provided evidence of a strong labour market, with 272,000 people added to the payroll in the month of May (vs 180,000 expected) and average hourly earnings remaining sticky at 4.1%. This saw a 15bps move higher in the 10-year US Treasury yield, to 4.45%, with a notable move in the number of cuts that markets expect for the remainder of the year. We note however, that this spike in yields comes after a steep rally from 4.60%, on weaker ISM survey and ADP payroll reports amongst other data. This week, US CPI and the FOMC meeting will take centre stage, with an expectation that numbers may continue to be bumpy and subsequently central banks will continue to be data dependent.

As mentioned earlier, the conclusions of last week’s data and news flow did not move the dial too much for us. Government rates continue to trade in the recent range and remain fairly volatile and highly reactive to different data releases. The macro context has not changed though. The economy continues to perform reasonably well which is supportive for spreads, even if they are at relatively tight levels, broadly speaking. The journey towards the 2% CPI inflation target continues to be bumpy but this is not unexpected, and at this stage the likely destination points to a relatively soft landing. While we acknowledge that the timing of exactly when inflation will be back within central banks’ objectives will remain difficult to predict, in this overall context, carry will continue to be the engine of returns for investors.