Macro developments were largely overshadowed this week by the Trump-Musk split, but despite the noise equities still broadly made ground. An upbeat payrolls report showed the US economy is a long way from being derailed, confidence reflected in the strongest weekly rises in Treasury yields since early April (2s +14bps, 10s +11bps) and a firmer USD across key pairs. The ECB continued its easing cycle with a 25bps cut but is seemingly closer to a pause until more clarity on the global trade situation is at hand; President Lagarde meanwhile said she is going nowhere in response to reports linking her to lead the World Economic Forum. US CPI data (Wednesday) is next week's highlight.
Solid US payrolls data suggests the labour market is holding up, though it is very early days in the global trade regime shift thrust upon the economy by the Trump administration. Nonfarm payrolls increased by 139k in May, topping the 126k expected outcome and holding the unemployment rate at 4.2%. Average hourly earnings growth firmed from 3.7% to 3.9%yr. There were some caveats: backward revisions lowered payroll gains over March and April by a combined 95k, while the steady unemployment rate came alongside a modest decline in labour force participation from 62.6% to 62.4%. Question marks obviously linger, but the figures saw the swaps market easing back from the two Fed rate cuts that were fully priced in by year-end.
The 8th cut of the ECB's easing cycle went through this week, seeing its 3 policy rates lowered by 25bps, with the main depo rate now at 2.0%. Indications at the press conference and in post-meeting reporting were that a pause is now on the ECB's radar, with rates thought to be around something resembling a neutral level. This drew a modestly hawkish reaction, with the swaps market becoming more confident in the view that the ECB will - on known circumstances - cut just once more this year. President Lagarde said rates were 'well-positioned to navigate the uncertain conditions that will be coming up' as a new set of staff projections trimmed the inflation outlook and left the forecasts for growth largely unchanged.
Global trade tensions are viewed as disinflationary for the euro area, with weaker oil prices and a stronger euro seeing forecast inflation at or near the ECB's 2% target across the projection horizon: 2% in 2025 (from 2.3%), 1.6% in 2026 (from 1.9%) and 2% in 2027 (unchanged). Core inflation was revised up this year slightly to 2.4% from 2.2% but then falls below target to 1.9% in 2026 and 2027. Trade uncertainty and a higher euro will be a headwind to growth. Subdued growth of 0.9% is expected this year into a very modest lift of 1.1% next year (vs 1.2% previously) and then 1.3% in 2027 (unchanged).
Australia's March quarter national accounts only reaffirmed that momentum in the economy is soft, but more light was shed on the part cautious households are playing. Slowing growth offshore was also seen in Australia as GDP in the March quarter softened to 0.2% from 0.6% in the December quarter, leaving annual growth steady at 1.3% - well below a par pace of something in the vicinity of 2.5%. With public demand - the stronghold for growth in the economy for more than a year - coming off in Q1 (-0.6%), the private sector was left to make the running.
The main story here is household consumption, which continues to disappoint (0.4%) despite real incomes that are now accelerating with the RBA having turned the tide on inflation - now back in the 2-3% target band. Further rate cuts will be needed and there was no indication from the May meeting minutes that the Board has other ideas. Households are more inclined to save than spend, an understandable response after sentiment took a turn for the worse on the tariff war. The household saving ratio lifted to 5.2%, its highest level since Q3 2022. My In review feature covers the national accounts in detail here.
