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Equity and risk markets generally recovered strongly last week – but US bond yields did not. The result was predictable: the dollar went into a sell-off and the European and Latin American currencies in particular benefited. The exchange rates of European currencies were boosted by the interest rate differentials between Europe and the US at the close. The prices of Latin American currencies rose in general due to the return of risk appetite, and in particular due to the scorching rally of commodities. The Polish zloty deserves an honourable mention, as it put in a top performance last week when it became clear that the Polish economy has not suffered too much from the war so far.
This week is all about macroeconomic data from the major currency zones: May flash inflation data for the eurozone will be released on Tuesday and the key US jobs report will close the week on Friday. On the inflation front, markets expect another increase in both the headline and core numbers. This would mean that the ECB will certainly raise interest rates in July at the latest. With expectations for more and faster interest rate hikes by the ECB being adjusted further, the euro should get a big boost. As a result, the recent price recovery may continue for a while. Below is the most important currency in detail
Economic activity PMI indicators held up much better in the euro area than in the UK and the US, suggesting that the euro area economy is much more resilient than previously thought. The data clearly pointed to growth, which means that the idea that a recession is imminent fades into the background and we are left with a monetary policy that is completely out of place in the inflationary and economic context. This week's inflation data will be another historic record. The actual figure will determine the size of the rate hike in July. If it turns out to be a nasty surprise, the probability of a 50 basis point rate hike is likely to rise and the common currency will be supported.
Economic activity PMI indicators were weaker in the UK than in mainland Europe in May. This is a puzzling divergence, and one worth keeping an eye on. The British pound and the interest rate markets did not care about these figures, but this important indicator will have to be really healthy in order to be able to rely on the Bank of England's forecasts of stable interest rate hikes. It should certainly not be lower than the disappointing 51.8 we have seen in the composite index. In the UK, largely less important and/or lagging figures will be released this week. We therefore expect that trade in the pound will be determined by developments elsewhere in the world.
Last week, a slew of minor figures were published, most of which were worse than expected. The weak housing market, in particular, kept the rally in the U.S. bond market going. The twelve-month spread between US and euro yields is now narrower than at the end of March, which is undoubtedly the main explanation for the recent recovery in the euro's value. Still, we don't expect this incipient weakness to have much of an impact on FOMC choices, as inflation is still well above the Fed's target. This week, we'll get the last key data points ahead of the Federal Reserve's June meeting: the May labor market report. Markets expect a pullback in wages, which are still lagging behind prices. If this report turns out to be a positive surprise, markets will start pricing in three consecutive 50 basis point rate hikes by the Fed.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
