Don't underestimate the resilience of the US economy, and don't underestimate the resilience of US stocks. This seems to be the biggest lesson the market gave us last week. Since the end of May, the overall performance of the US economic data has been weak, but the May non farm payroll data released last Friday once again exceeded expectations, forcing investors to lower their bets on the September interest rate cut.
The recent conflict between employment data has not given the market a clearer direction. Looking ahead, the focus of market attention has shifted to this week's inflation data and the Federal Reserve's interest rate meeting. Due to the recent sharp drop in oil prices, the May CPI data is expected to cool down, which will also alleviate market concerns about inflation to some extent.
Considering the uncertain outlook for longer-term inflation, it is highly likely that the Federal Reserve will lower its annual interest rate cut guidelines to align with market expectations (two rate cuts). In addition, the probability of the Federal Reserve cutting interest rates in July is already extremely low, and the market's focus is more on the September interest rate meeting.
On the European front, the European Central Bank announced a 25 basis point interest rate cut as scheduled last week, in line with market expectations. In addition, the European Central Bank has provided vague guidance that leans towards the hawkish side, stating that it does not make any prior commitments to any specific interest rate path. In today's uncertain inflation situation, the vague guidance and dynamic adjustment adopted by the European Central Bank seem to be an inevitable choice.
The foreign exchange and interest rate markets are unlikely to receive much nourishment from this week's Federal Reserve interest rate meeting. For a foreseeable period of time, forex traders are likely to choose range trading, with the US dollar index and the euro almost maintaining a mild upward trend. In this situation, the main driving force behind the upward trend of the US dollar index actually comes from the relatively low weighted but significant decline in the Japanese yen.
Don't underestimate the resilience of the US economy, and don't underestimate the resilience of US stocks. This seems to be the biggest lesson the market gave us last week. Since the end of May, the overall performance of the US economic data has been weak, with first quarter GDP correction, ISM manufacturing index, JOLTS job vacancies, ADP employment numbers and other data falling short of expectations. The continuous cooling of economic data has once again ignited the market's longing for a rate cut, but the May non-farm employment report released last Friday (June 7th) once again exceeded expectations, forcing investors to lower their bets on a rate cut in September.
Overall, there are still some areas worth pondering in the May non farm employment report, such as the unemployment rate rising slightly to the 4.0% mark despite significantly exceeding expectations in new employment. We believe that there may be two factors that have led to this conflict: (1) an increase in the proportion of multiple workers, which will result in a significant increase in the number of new jobs; (2) The increase in immigration (including illegal immigration) has led to an expansion of the employment base, resulting in an increase in employment while the overall unemployment rate is also rising. But from another perspective, an increase in immigration is a good thing, not only beneficial for consumption, but also for reducing inflation.
The conflict between employment data has not given the market a clearer direction. Looking ahead, the focus of market attention has shifted to this week's inflation data and the Federal Reserve's interest rate meeting. The recent sharp drop in oil prices has led the market to expect a cooling of the May CPI data compared to before, which will also slightly ease concerns about inflation in the market. From these data, it seems that the market should not be overly optimistic about the US economy, but there is also no need to be overly pessimistic. The trend of US bond interest rates also reflects this. The weak data before Friday pushed the 10-year US bond interest rate down to below 4.3%, but after the release of the non farm payroll report, it directly rose by dozens of basis points to above 4.45%.
Unexpectedly, the US stock market showed extremely strong stability during this period, with consecutive gains in the previous few days of interest rate decline. Although interest rates quickly rose in the future, the US stock market only closed slightly lower. In summary, the US stock market has shown a pattern of two in and one out, proving that it is still a market highly favored by funds.
On the European side, the European Central Bank announced a 25 basis point rate cut at its June interest rate meeting, in line with market expectations. In addition, the European Central Bank has provided vague guidance that leans towards the hawkish side, stating that it does not make any prior commitments to any specific interest rate path, that is, there will be no rate cuts in July, and September will depend on the situation. Against the backdrop of recent upward inflation in the eurozone, it is reasonable for the European Central Bank to make a cautious statement. This forward-looking guidance also largely indicates that the European Central Bank is not confident about future economic and inflation trends, which is precisely the attitude of major central banks around the world: in today's uncertain inflation, vague guidance and dynamic adjustment seem to be an inevitable choice.
At the upcoming Federal Reserve interest rate meeting this week, the latest chart and economic forecast data will be released simultaneously. Under the benchmark scenario, it is highly likely that the Federal Reserve will lower its interest rate cutting guidelines for the entire year, approaching market expectations (i.e. two or so rate cuts), while demonstrating determination and patience in controlling inflation. Under this expectation, the probability of the Federal Reserve cutting interest rates in July is already extremely low, and the market's focus is more on the September interest rate meeting. Powell is also likely to reiterate that the interest rate hike cycle has ended, and whether to cut rates in September still requires more data and other scripted statements.
The foreign exchange and interest rate markets are unlikely to receive much nourishment from this week's Federal Reserve interest rate meeting. Just as the euro rose before the European Central Bank's interest rate discussion and fell after the discussion, the market basically digested the relevant information and closed its previous positions after the boots landed. Overall, for a foreseeable period of time, forex traders are likely to choose range trading, with the US dollar index and the euro almost maintaining a mild upward trend. In this situation, the main driving force behind the upward trend of the US dollar index actually comes from the relatively low weighted but significant decline in the Japanese yen.