Rates Spark: US payrolls more exciting than first ECB cut

There it was, just as everyone expected, the first 25bp cut was announced by the European Central Bank. The cut is not an entirely uncontroversial one with many sounding the risk that the move comes too early against a backdrop of lingering inflation. But for the past months markets have been more focused on the potential easing path hereafter since the June cut was a given. Unfortunately we did not get much wiser about the path forward from Lagarde’s press conference.  

The 2-year euro swap rate jumped by around 4bp after the decision, which is a relatively muted reaction considering the symbolic weight of a first cut. The uptick could be attributed to the statement’s mention of wage strength and slightly higher inflation in the inflation projections. The 10-year yield joined up and thus the 2y10y slope closed the day on the same level as the open.

Short-end rates don’t seem to have a clear direction on where to aim for next, with markets divided on whether to expect one or two more cuts this year. We think the deciding push towards two more cuts, in September and December, will be coming from further US weakness. Any surprises in the US payrolls figures later today (either way) could therefore have a considerable impact on the short end of euro curves.

US payroll figures will likely cause more excitement than the ECB cut. With US rates down significantly since last week, markets seem to be prepositioned for an economic disappointment. Consensus sees numbers coming in at 185k for the nonfarm payrolls for May, a touch above the 175k last month.

Any reading close to consensus, however, would in our view actually be a catalyst for higher yields. The number would be well below this year’s average, but it would not reflect worrisome economic weakness. And with inflation still not where the Fed needs it to be, we think the 10y UST should see higher yields in that case.