“To The Left, To The Right”

By Rabobank

Yesterday the Dutch national team sealed a 3-0 victory against Romania which resulted in festivities amongst enthusiastic fans. Earlier, Dutch football supporters went viral on social media for celebrating the European Championship while dancing to a Dutch party song of which the simple refrain goes like: To the left, to the right. Simple lyrics that could easily be applied to the upcoming elections in France next weekend.

Indeed a question that many market participants will ask themselves is: Will France go to the left or to the right? According to French newspaper Le Monde no less than 221 candidates have withdrawn their candidacy for the upcoming election. This in order to improve chances for a victory of either Macron’s renaissance movement or the left coalition in order to prevent the electorate of swinging to the right. 

Activity in China’s services sector –reflected by the Caixin services PMI– still expanded, albeit at the slowest pace in 8 months. This indicates that China’s economy continuous to struggle to gain stable traction and confirms our view that our current forecast of 4.9% has significant downward risks. The index came in at 51.2 while 53.4 was expected. Rising competition and softer expectations regarding the economy also led to smaller firms being more cautious about hiring staff.

Jolts job openings came out yesterday and while the previous figure for April was revised downward (from 8,059,000 vacancies to 7,919,000), the data for May surprised to the upside. Economists forecasted 7,946,000 vacancies but the first estimate came out at 8,140,000 vacancies which seems to indicate that the labor market is still quite resilient. Of course markets will await the ADP report later today which is expected to show a relatively mild job growth of 165k jobs, whereas current polling for the non-farm payroll report that will be released on Friday hovers around a job growth of 190k.

In combination with the average hourly earnings that will be released at the same time and date, this will provide the market with an important overall picture over the general situation on the US labor market. The regular reader of the Global Daily of course knows that this is important input for the Fed.

Indeed Fed president Jerome Powell stated only yesterday that: “Because the US economy is strong and the labour market is strong, we have the ability to take our time and get this right.” During a panel at the European Central Bank Forum on Central Banking, Powell added: “And that’s what we’re planning to do.” Furthermore he said inflation is getting back on a downward path.

But we all know that inflation is notoriously hard to predict. Moreover, a Trump victory seems ever more likely which we expect will lead to higher tariffs and as such, higher inflation. So the writer of today’s Global Daily suggests:  let’s take our time as well later today and on Friday and see what the latest data will tell us about the most recent developments and what this might mean for monetary policy. For now we stick to our view that the Fed will lower the Fed Funds rate just twice this year, and two times next year before it is forced to take a pause in the second half of next year.

Markets however don’t seem to take their time and continue placing their bets on a steady continuation of rate cuts. This is illustrated by today’s opening of European stock markets that track a record S&P 500 close. The latter closed above 5,500 for the first time which is the 32nd time this year that the index touches a new record. As such a lot of good news seems to have been priced in making it increasingly vulnerable for a correction