“With a jump to the left, a step to the right, let’s do the time warp again”. Richard O’Brien

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Overall, it was an okay week for stock markets around the globe as most major indexes eked some form of gains in the past 5 days. The fact that the ECB had followed through on its rate cut on Thursday further signs that the US economy was slowing down, giving hopes that a weak US jobs report would encourage the Fed to a more dovish stance this week and possibly set the tone for a rate cut in September. In the end, the headline number blew the lights out as May non-farm payrolls, i.e. jobs created in May, came in at 272,000, against an expected 182,000 and what they call the whisper number of 165,000. Average earnings rose month over month by 0.4% against an expected 0.3%. Bonds took fright; the yield on the 2-year Treasury rose 15 basis points, coming close to 4.9% and within touching distance of 5% again. The US stock market did not know what to make of it all: good news as employment remains strong or bad news as this possibly dashes the hope of a rate cut. The unemployment rate did rise to 4%.  

Over the weekend, the much-anticipated lurch to the right among European voters came to pass. Marie Le Penn in France won, forcing Macron to call a snap election. Georgia Meloni wins in Italy with the Brothers of Italy party. Germany’s right-wing AfD party claimed 2nd place behind the centre-right CDU, claiming the top spot. So, the anticipated move to the right happened in Europe. In the coming weeks, it will be interesting to see what that does for spreads between yields in domestic bonds. Will the spreads widen between Italy and Germany, not to mention France, whose credit rating was downgraded in the past week? Will this outcome weaken the euro against other major currencies? There has already been an initial selloff against the dollar. How will this influence the UK election on the 4th of July as we look to be heading to the left?

The week ahead is going to be dominated by the Fed meeting on Wednesday. Have all hopes of a rate cut before year-end been dashed by Friday’s data? On Wednesday morning, ahead of the outcome of the Fed’s 2-day meeting, we will get the monthly US inflation data. The Bureau of Labor Statistics will report the consumer price index for May. The consensus estimate is for the CPI to increase by 3.4% year over year, matching the April data. There is no expectation the Fed will cut this month.

This week, ahead of the Bank of England’s monthly meeting later in the month, the UK will receive employment and monthly GDP data, industrial production, construction output, and trade balance. The jobless rate is expected to hold steady at 4.3%, while average regular pay growth is forecasted to remain at 5.7%. Stocks in Europe are expected to start on the back foot this morning.