A tech-led sell-off due to ongoing valuation concerns in the mega-cap sector weighed on global equities and by extension risk sentiment more broadly this week. In the FX, that backdrop hit cyclical currencies the hardest, with the euro and Australian dollar seeing the largest falls against an in-form US dollar - the DXY index sitting at its highest levels in more than a year, boosted by the recent hawkish Fed repricing. Meanwhile, safe-have demand saw bond markets rally, driving US 2-year and 10-year Treasury yields down by nearly 10bps over the week. In the UK, PM Starmer's resignation had little discernible impact on Sterling or UK assets.
Strong Australian data was helpful for an RBA that elected to maintain its tightening bias at last week's meeting. However, markets remain unconvinced further tightening is required, leaving pricing for another hike this cycle largely unchanged at a one in three chance. The labour market added around 40k jobs in May, outperforming consensus (32.5k) but only rebounding from the seasonal fall in employment around Easter following downward revisions to April (-40.7k). Nonetheless, the unemployment rate fell back to 4.4%, partly reversing its rise to 4-year highs of 4.5% the month prior (see here). Meanwhile, job vacancies - despite falling 2.1% in the three months to May - remained at a little above 2% of the labour force, levels consistent with robust labour demand.
Headline inflation fell 0.7% month-on-month in May, slowing the annual rate from 4.3% to 4%; however, that was mainly due to the ongoing effect of the excise tax cut on fuel prices (-11.9%). Core inflation, the RBA's main focus, firmed in May (0.4%) to lift further above the target band, up from 3.4% to 3.6%yr (see here). That is likely to reaffirm the RBA's view that the earlier cash rate hikes were justified and that it may yet tighten further. Household spending lifted 1.3% month-on-month in May, likely also contributing to that narrative (see here).
In the US, data confirmed inflation pressures are on the rise. The PCE deflator was up 0.4% month-on-month in May seeing the annual rate lift from 3.8% to 4.1%, a 3-year high. The core measure that the Fed sets policy to was in line with expectations at 0.3% month-on-month, firming from 3.3% to 3.4% year-on-year, significantly above the central bank's 2% target. Markets assign a 70-80% chance to the Fed hiking by year-end. The same report showed that that personal spending lifted above expectations with a 0.7% month-on-month rise, continuing to defy very weak sentiment.
Comments by ECB President Lagarde to the EU parliament were seen as broadly balanced, keeping the door open for further rate hikes while playing down the need for aggressive tightening. That stance acknowledges the uncertainty of the outlook as well as the risks to growth being weighted to the downside. By contrast, the ECB's Schnabel said that as things currently stand, more hikes would be needed.
