Powell warns rates to stay higher for longer

Fed chair Jerome Powell said that the Fed needed to be “patient and let restrictive policy do its work” in comments at a finance conference overnight. Chair Powell said that it will “take longer for us to become confident that inflation” is getting close to target and also pushed back against the prospect of hiking rates further, instead saying that it’s “probably a matter of just staying at that stance for longer.” Persistent strength in inflation prints along with a still robust labour market are giving the Fed pause on when it can begin to cut rates. Producer price inflation for April was released overnight which showed a 0.5% m/m gain, higher than market estimates, while markets will be highly attentive to the release of CPI later today.

The UK labour market showed some more evidence of easing in the three months to March with the headline unemployment ticking up to 4.3%, its highest level since July last year. The number of employees on payrolls dropped by 85k in April, a much larger drop than the 4.6k recorded a month earlier and the largest single-month decline since the peak of the pandemic in 2020. Wage growth, which has given the Bank of England pause on how willing it is to cut rates, was stable at 6% y/y in March. Markets are inching up their expectation for a June rate cut from the Bank of England though it is still someway off a certainty. The release of UK inflation data will give a stronger signal if the BoE can indeed start its cutting cycle earlier than the Federal Reserve.

The German ZEW survey improved in May with investor expectations rising to 47.1 from 42.9 in April. The print was also ahead of market expectations. The current conditions component also improved though remains negative at -72.3 for May from -79.2 a month earlier. Near-term indicators for Germany’s economy suggest that it has begun to turn a corner with the composite PMI for April moving above the 50 neutral level for the first time since June last year.

Saudi Arabia’s finance minister Mohammed Al-Jadaan said in remarks at the Qatar Economic Forum said that “funding is one part” of the constraints on delivering projects related to Saudi Arabia’s Vision 2030. Minister Al-Jadaan remarked that “economic leakage” was the more important constraint on delivering projects, seeming to refer to higher rates and inflation.

Today’s Economic Data and Events

• 10:00 KSA CPI y/y Apr
• 10:45 FR CPI y/y Apr (F): forecast 2.2%
• 13:00 EC GDP q/q Q1 (P): forecast 0.3%
• 16:30 US CPI m/m Apr: forecast 0.4%
• 16:30 US CPI y/y Apr: forecast 3.4%
• 16:30 US retail sales m/m Apr: forecast 0.4%

Fixed Income

• US Treasuries initially sold off in response to the higher than expected PPI print for April but then faded those moves and ended the day higher. The 2yr UST yield dropped almost 5bps to 4.8147% while the 10yr yield fell by about the same amount to 4.4394%.
• In European markets, bonds were generally lower with bund yields up almost 4bps to 2.546%.
• Emerging market bonds gained overnight as did high-yield bond indexes.

FX

• The dollar sold off against peers overnight ahead of the release of today’s CPI report. EURUSD added 0.3% to close at 1.0819 while GBPUSD added 0.3% to settle at 1.2592. USDJPY, however, moved against the yen with another rise of 0.1% to 156.42.
• Commodity currencies were positive as a rule with USDCAD edging lower by 0.1% to 1.3651 while AUDUSD added 0.3% to 0.6627 and NZDUSD gained 0.4% to 0.6041.

Equities

• Equities appeared to take the messaging from Fed chair Jerome Powell on rates needing to stay higher for longer in their stride with all major indexes in the US rising. The Dow Jones added 0.3% while the S&P 500 gained 0.5% and the NASDAQ jumped 0.8% on the day. European markets were a little more muted with the Euro Stoxx index tilting positive while the FTSE added 0.2%.
• In Asian markets today equities are mixed. The Nikkei has added 0.5% while the Hang Seng is lower by 0.2%.
• Local markets were negative overnight with the DFM down 0.9% while the ADX fell by 0.5%. The Tadawul also dropped by more than 1%.

Commodities

• Oil markets gave back all of the prior day’s gains overnight with a 1.2% drop in Brent leaving it at US 82.38/b while WTI fell by 1.4% to close at USD 78.02/b. Markets will be looking out for the release of the IEA’s monthly oil market report later today along with US inflation data and its implication for rates.
• The API reported a draw in crude inventories of 3m bbl last week along with a drop in gasoline stockpiles of 1.3m bbl. Distillate stockpiles were moderately higher.
• OPEC published their latest oil market monthly report overnight and left their demand growth forecasts for 2024-25 essentially unchanged at 2.25m b/d and 1.85m b/d respectively. For oil production outside of producers that are part of the Declaration of Cooperation (OPEC+), they estimate supply growth of 1.2m b/d in 2024 before slowing to 1.1m b/d next year, unchanged from their previous estimate.