Growth has turned out less vigorous than expected

The EUR/USD parity is still in a period of consolidation. For almost two months now, it has moved between 1.200 and 1.2275 in anticipation of events which could give it new momentum. The publication of the May US employment situation report, so eagerly awaited by the equity and bond markets, brought little volatility. Rather, investors have been reassured growth that has turned out less vigorous than expected, and fears of monetary tightening by the Fed are once again receding somewhat. In this context, the US economy created 559,000 jobs in May, against 675,000 expected and 278,000 in April. Unemployment fell further from 6.1% to 5.8%. Still, the process of recovering the jobs lost last year continues, and 7.6 million jobs are still missing compared to February 2020. And while the reopening of companies, the increase in production capacity and activity in the service sector as shown by the ISM Non-Manufacturing Index have rebounded strongly in May, the Fed should continue to opt for the status quo these coming months. Despite growing dissensions within it, the Fed will certainly reiterate that the rise in inflation – 4.2% in April on an annual basis – is only temporary and that the economy still needs to be supported despite growth above 6% in the first quarter. The improvement in the American labour market, the rise in inflation and growth still do not seem to reassure the institution to the point of translating into a rebound in long rates and a turnaround in the Fed’s monetary policy.

The EUR/CHF parity is also experiencing a period of low volatility and has been moving between 1.0900 and 1.1000 in recent weeks. But the franc strengthened imperceptibly, taking advantage of solid economic figures, the strength of the recovery in Switzerland and the not-very-attractive yields of the other major currencies. Thus, from the franc’s lowest point at 1.1152 on 4 March, our currency has slowly but surely regained the ground lost in February.

In Russia, consumer prices started to rise in March 2020, after months of historically low inflation amid the oil crisis and the falling rouble. On Monday, the consumer price index continued its rise in May and came out higher than expected at 6%, up from 5.5% the previous month and 5.8% expected. This inflationary surge will almost certainly result in a 50–basis point hike on Friday at the central bank’s monetary policy meeting. This is reflected in Russian rates with a market that is already “pricing” 54 points up before this June meeting. Analysts are even starting to consider a potential further half-point hike at the July meeting. As a reminder, the CBR had already applied a 25–basis point hike in March this year, and a 50–basis point hike in April.

The Turkish lira is still under high pressure and hit a new all-time low against the greenback at 8.7525 lire per dollar on Friday. Despite the better-than-expected inflation figures that came out last Thursday, the Turkish currency still lost ground. Inflation came out at 16.59% in May against 17.14% the previous month. This pressure on the Turkish currency is how the markets are penalising it in the face of the uncertainty surrounding the monetary policy of the central bank and its independence.

In China, activity in services slowed in May, although it remained positive. The purchasing managers’ activity index (PMI) for services stood at 55.1 points in May, against 56.3 the previous month. However, the companies surveyed reported a significant increase in their orders, which is putting pressure on their operational capacities. The yuan, which traded at 6.3525 per dollar on 31 May – the highest since June 2018 – has fallen slightly since. This was, among other things, at the instigation of a central bank concerned about the rise of the yuan, which thus imposed on Chinese banks an increase in their reserves by 2% which should increase their cost of financing. By doing so, the PBOC sent a signal to the market that it was worried about the currency rising too quickly and that it wanted to temper it.

Central banks will be back in the spotlight these coming days with the Bank of Canada today, the ECB tomorrow, the Fed next Wednesday, the SNB and the Bank of Norway on the 17th and the Bank of Japan on the 18th.