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G10 Macro Rates Market Analysis – Weekly Review – 8th June 2020

Monday, June 08, 2020

With the Pacific G10 Macro Rates Team 
Last week economic data joined fiscal and monetary authorities in driving financial markets, probably the first time since the start of the pandemic. The ECB surprised markets by extending the Pandemic Emergency Purchase Programme (PEPP) by EUR 600bn and announcing reinvestments. This led to a significant rally in the periphery vs. core countries, adding to the bullishness from an additional fiscal stimulus (including temporary VAT cut) announced by Germany earlier in the week.

The main event of the week was on Friday when the employment report in the US came out way better than economists’ expectations. The unemployment rate dropped to 13.3% almost 3% below the lowest estimate on the Bloomberg survey of 16%. This added to the optimism coming from the signs of economic recovery in other data. The vast majority of jobs were generated in hospitality sector with a relatively low skilled labour and low wages dragging average hourly earnings lower. However, questions remain on the actual size of the labour market slack and will only become clearer when the economy re-opens and Government support programmes roll over.

Risk assets further benefited from the optimism last week (S&P up +4.75%, WTI up 12% to almost $40 and US HY yields rallied almost 1.5%). Even government bonds reacted in a risk-on way at last, with US Treasuries and German Bunds selling off by over 20bps.

North America
US: The ISM Manufacturing survey for May came in-line slightly below the expectations at 43.1 (43.8 exp., 41.5 prev.). Labour data was much stronger than expected, as Nonfarm Payrolls increased by over 2 million and unemployment dropped to 13.3% (19% exp., 14.7% prev.).

Canada: Employment increased by 290k (-500k exp., -2mil prev.).

Europe
Eurozone: Unemployment in Germany increased more than expected by 238k (190k exp., 372k prev.). In Italy, May Manufacturing PMI was much better than expected at 45.4 (36.8 exp., 31.1 prev.), while Services PMI was slightly above expectations at 28.9 (26.1 prev., 10.8 prev.). In Spain, May Manufacturing PMI was in line with expectations at 38.3 (37.8 exp., 30.8 prev.) and Services PMI was at 27.9 (25 exp., 7.1 prev.).

Japan
CapEx increased 4.3% YoY vs. the expectations of a -5% drop in Q1. No other major data releases.

UK
House prices registered -1.7% fall in May according to Nationwide. Revisions to PMIs were not significant as they continue to show that activity remains low as the government continues the lockdown policy.

Australasia
Australia: RBA came out very optimistic after their monthly meeting, as the economy performed better than the had feared. Q1 GDP report came in at -0.3% QoQ (-0.4% exp., -0.5% prev.).

New Zealand: No major data releases.

For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below                                 

Read the Strategy Information Sheet

IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation.

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