Warm summer wind

Another solid week for stocks, supported by what appears to be a decent jobs report on Friday. The headline number was 139,000 jobs created in May, slightly exceeding expectations of 130,000, while the unemployment rate remained steady at 4.2%. Some analysts were quick to note that beneath the surface of the numbers, there were further indications that Trump’s erratic trade policies are affecting the employment market, but not enough to indicate an impending recession. Trump once again urged the Fed to cut rates immediately by a whole percentage point, following the ECB’s cut to 2% last week, and the jobs report.

The primary issue when comparing the two is inflation expectations, which is why there are currently policy differences between the Fed and the ECB. Eurozone inflation is forecast to decline to just 1.6 per cent next year, whereas the Fed’s preferred inflation metric is expected to rise from its current level of 2.1 per cent to above 3 per cent by the end of the year. That is the problem in a nutshell. As the two-year US Treasury yield has climbed back over 4%, bond markets, which, to be fair, have been poor at predicting interest rate policy over the past couple of years, now forecast only one rate cut from the Fed this year, with a 75% chance of a second.

What do we have to look forward to this week? On Tuesday, it’s our turn for some job data, as we receive the latest unemployment rate and average earnings. The trend over the past few months has indicated that wage growth remains high alongside a rising unemployment rate. Forecasters expect little change this month, with wage growth anticipated to remain around 5.5%, while the unemployment rate is expected to stay around 4.5%. The excitement in the US begins on Wednesday with the latest inflation data, where forecasters predict the year-over-year rate will climb to 2.5%. Then, on Thursday, we return to the UK for some trade data, industrial and manufacturing production, as well as the monthly GDP report, all of which are expected to show modest declines from the previous month. In the US, we will receive the monthly Producer Prices, which are forecasted to increase from the previous month, along with jobless claims. More data on Friday for the Fed to consider as they prepare for the monthly rate-setting meeting the following week, including the results of the Michigan Consumer Sentiment survey and inflation expectations. It will be a busy week for economists.

Equity markets in Europe are starting the week on the back foot. As we enter the uncertain summer months, there is so much uncertainty surrounding US policy and the ongoing negotiations over the budget bill. There seems to be little reason to rush into chasing the rally.