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ECB and BoC Cut Rates

BentinPartner Weekly



Over the past week, Tech and mega cap stocks rallied to new all-time highs with Nvidia becoming a 3trn company after a 5% gain on Wednesday.

 

The major catalysts last week were the OPEC meeting on Sunday which decided to restore some supply causing oil to drop, May economic data and two central banks which started cutting interest rates.

 

ISM manufacturing started the week poorly, contracting more than expected in May to 48.7 (from 49.2 last), with both the current and leading components of the survey pointing downwards, confirming weaker data published earlier this month. Treasuries rallied with yields dropping 10bps that day. Later on, Tuesday, the weak JOTS survey also took the market by surprise showing a decline of 4.1mn job openings since March 2022, a record with pace not slowing.

 

The decision of the Bank of Canada to cut rates and the election outcome in Mexico led to a weaker CAD and a sharp decline in MXN as the the left wing Morena party was feared to get, with a 2/3d majority in parliament, the possibility to revise the Constitution, take over the Constitutional court and impair the Central bank’s independence. The MXN carry trade has been one of the most profitable currency trade for months and the combination of lower oil prices and this political outcome created the excuse for an aggressive currency selloff which will take some time to heal. 

 

The decision of the ECB to cut rates on Thursday was largely anticipated (unlike a simultaneous announcement of higher inflation expectations for this year and next) and led to little market response.

There was no clear signalling as to whether the ECB would cut again in July.

 

The US economic data saving grace came on Friday with a better than expected US Non-Farm Payrolls report with 272k jobs reported to have been created (vs. 180k expected). The report was heavily criticized one more time for being misleading and overstating the pace of job creation coming for the most part (and again in May) from Birth/Death Model, drawing conclusions opposite to most other job data, including the household survey published on Thursday, the deteriorating jobless claims and even the unemployment published on Friday which increased to 4% (from 3.9%).  The report will not help the Fed to cut rates sooner and yields rose 15bps on Friday across the curve, essentially wiping out the week’s gains.

Mohamed El-Erian opined that the longer the Fed remains on hold, the more damage gets done to an economy that appears strong on the surface but is showing more signs of fragility ahead. Citi and JPMorgan among the few who predicted a Fed cut in July, shifted their call for September or Novemebr. November being an election is unlikely. September remains thus the most likely at this stage.

 

Moodys also announced they were reviewing several US regional banks for a possible downgrade.

 

Gold (and silver) sold off aggressively on Friday in a move that was triggered by three catalysts that will have a short shelf life, in our view;

 

- a “strong” US NFP report which raised yields (back to where they traded at the beginning of the week). As stated above, this report is flawed due to erroneous assumptions of the birth/death model which cumulatively overstated job creation by 800k to 1mn over one year according to Goldman Sachs, and conveyed a diametrically opposed message to that of other job indicators (including the unemployment rate which climbed back to 4% on Friday), suggesting the Fed should already be cutting rates… (which it ultimately will do in September because the Fed knows the report is flawed and partial).

- a first skip in PBOC’s gold purchase in May as reported by the IMF. China can only buy serious amounts of gold when it trades lower. And they would not mind obscuring their game to the IMF either. The reason why Central Banks accumulate ever more gold was laid out in this 2023 article which has not taken a wrinkle.

- expiring CME gold contracts is seasonally preceded, most of the time, by a selloff, forcing speculators to either liquidate or roll futures instead of paying up for delivery.

 

This is likely not what tops are made of, especially as the aggressive selling took place on Friday (coming from nowhere before the NFP report) started just after the close of the Shangai Gold Exchange and ahead of  a long Chinese week end which would rather favour the scenario of collusive commercial traders assault intended to bring the price of the entire precious metals complex down (rather than executing a selling program that would have no rational explanation).  Indians are more likely to buy back today and Chinese on Tuesday when they return.

 

 

Apple will communicate on Monday on the occasion of the world-wide developers’ conference when the company is expected to lay out how it plans to integrate AI into its products (no revolution is expected, just an upgrade will be necessary). Nvidia stock split 1/10 will become effective today likely to trigger some interest and hype as well.

The FOMC meeting outcome will come on Wednesday (just hours after the release of latest US CPI data) when the Fed will also release its quarterly economic projections (and dot plots).

Tesla will hold its annual meeting on Thursday.

BoJ next announcement is scheduled for Friday with no policy change expected. 

 

 

 

 

 

Over the past week, the S&P500 gained 1,3% (12,3% YTD) while the Nasdaq100 rallied 2,7% (13,0% YTD). The US small cap index sold off by -2,2% (0,2% YTD, Z-score -2,1). AAPL rallied 2,4% (2,3%, Z-score 2,1).

The Equally Weighed SP500 dropped -0,7% (4,3% YTD), underperforming the S&P500 by-2,0%. The median SP500 YTD return closed the week at 4,0%.

CBOE Volatility Index sold off by -5,4% (-1,8% YTD) to 12,22.

The Eurostoxx50 gained 1,5% (14,4%), outperforming the S&P500 by 0,2%.

Diversified EM equities (VWO) gained 0,3% (5,2%), outperforming the S&P500 by -0,9%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,3% (6,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,2% (-0,8%).

 

10Y US Treasuries rallied -7bps (55bps) to 4,43%. 10Y Bunds dropped -4bps (60bps) to 2,62%. 10Y Italian BTPs dropped -2bps (26bps) to 3,96%, underperforming Bunds by 2bps.

US High Yield (HY) Average Spread over Treasuries dropped -5bps (-20bps) to 3,03%. US Investment Grade Average OAS climbed 3bps (-9bps) to 0,96%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 0bps (-9bps) to 0,58%.

 

Gold dropped -1,4% (11,2%) while Silver sold off by -4,1% (22,5%). Major Gold Mines (GDX) sold off by -5,0% (8,2%, Z-score -2,8).

 

Goldman Sachs Commodity Index sold off by -2,2% (3,3%). WTI Crude dropped -1,9% (5,4%).

 

 

 

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