US services activity stronger than expected in May

The US ISM services index rebounded sharply in May, rising to a value of 53.8 from 49.4 in April. While consensus had been for the index to return to expansionary territory in May, the gain was larger than expected. Underlying the headline improvement was a jump in both the business activity and new orders components. While the prices paid sub-component eased back to 58.1 (from 59.2) commentary from respondents noted the continued pressure felt by firms as a result of higher input costs.

The ADP employment report suggests that US private sector payrolls rose by 152k in May, down from 188k the month prior and below expectations for a 175k gain. The ADP numbers add to other measures, such as the JOLTS job openings print, which have shown signs of a cooling in labour market conditions. There were declines in payrolls amongst both professional and business services firms, together with a 20k fall in manufacturing firm workers.

The Bank of Canada cut interest rates by 25bps to 4.75% yesterday, the first of the G7 nations to begin easing policy. Comments from BoC Governor, Tiff Macklem, pointed to the likelihood of further easing in coming months, saying that provided inflation continued to fall towards target, it was “reasonable to expect further cuts”.

Egypt’s net international reserves have risen to a record USD 46.1bn in May, up from USD 41.1bn in April and just USD 35.1bn in February, prior to the transfer of significant funding from the UAE and IMF over the past several months. The international support, with more pledged from the EU and World Bank also, has helped Egypt start rebuilding its finances, clearing an FX backlog, and paying off arrears to international oil companies.

Markets will be looking ahead to the ECB’s interest rate decision later this afternoon. The European Central Bank looks set to begin easing policy with markets anticipating a 25bps cut at today’s meeting, bringing the deposit facility rate down to 3.75%. Headline inflation in the Eurozone economy has slowed substantially, from a peak of near 11% in October 2022 to 2.6% at present. Our own forecast is for three rate cuts from the ECB this year, starting this week then one 25bps cut each in Q3 and Q4.

Today’s Economic Data and Events

10:00 GE factory orders (Apr), Forecast: 0.6% m/m

13:00 EC retail sales (Apr), Forecast: -0.3% m/m

16:15 ECB Deposit Facility rate, Forecast: 3.75%

16:30 US Initial jobless claims (w/e Jun 1), Forecast: 220k

Fixed Income

US treasury yields fell for a fifth day on Wednesday, despite the stronger than expected ISM services print. Both the 2yr and 10yr yield fell by 5bps to 4.722% and 4.2755%, respectively. Outside of the UK and Netherlands, there was also a broad-based move lower in major European bond yields. The 10yr Bund yield declined 2bps to 2.511%, while the 10yr Gilt yield was broadly flat.

FX

Moves in the dollar were mixed against major peer currencies on Wednesday. EURUSD fell 0.1% to reach 1.0869, while GBPUSD gained 0.13% to 1.2787. The Japanese Yen unwound the previous day’s gains, with USDJPY falling 0.8% to 156.11.

Commodity currency moves were similarly mixed against the dollar. NZDUSD gained by 0.26% to 0.6193, while AUSUSD was broadly flat. CADUSD gained 0.13% to 1.3694 after the BoC cut rates.

Equities

Technology companies once again drove US equity markets higher on Wednesday. The S&P 500 reached a new all-time high, rising 1.18%. The NASDAQ gained 1.96% and the Dow Jones rose 0.25%.

European equity indices rallied on expectations of an ECB rate cut on Thursday. The CAC 40 gained 0.87%, the EuroStoxx 50 rose by 1.66% and the DAX increased by 0.93%. The FTSE 100 gained 0.18%.

Locally, the DFM fell 0.14% and the ADX remained broadly unchanged.

Commodities

Oil prices rebounded on Wednesday, after an initial further drop off following the EIA reporting a 1.2 million barrel rise in crude stocks in the final week of May (consensus had been for a fall). The rally appears to have been driven by markets’ growing confidence about the prospects of a cut to rates by the Fed this year. Brent gained 1.15% to reach USD 78.41/b, while WTI rose 1.12% to USD 74.07/b.