US Employment Data, ECB Rate Decision, ISM Reports

Markets are looking to interest rates and jobs data for direction after the sharp reversal of recent weeks

• Stocks were hammered after the release of US PCE data, leaving investors with mixed signals.

• The US ISM services survey and labor market data will shape the Fed’s rate cut outlook.

• The euro remains in balance with the ECB set to cut rates even as inflation rises.

Stock markets ended a quiet week cut short by the holidays with an impressive performance on Friday.

The long-awaited US personal consumption expenditures (PCE) report came in in line with expectations, putting core inflation at 2.8% year-on-year for the fourth month in a row. This was not at all unusual. Market watchers are usually good at forecasting PCE once they have consumer price index (CPI) and producer price index (PPI) data in hand.

Traders responded with optimism at first, as if relieved by the passing of the risk of the event. The bellwether S&P 500 stock index rose with U.S. Treasuries as yields fell against the U.S. dollar. Gold prices rose. Markets seemed encouraged that the data did not prompt further reductions in expectations for a Federal Reserve interest rate cut.

However, this response proved short-lived. A mere hour of optimism quickly gave way to a wide pivot of danger. While Treasury yields hovered near record lows for most of the day, stocks and gold prices fell sharply as the dollar recovered against major currencies, erasing its intraday losses.

Then, in the final hours of the day, there was another sharp reversal. Wall Street’s major benchmarks rumbled higher, seemingly without rhyme or reason, paring earlier sales. The tech-leaning Nasdaq would close almost flat, down almost 2%. The S&P 500 ended with a gain of 0.9%, also down to session lows.

Surprisingly, this unexpected face seemed to be localized in the space of capital. Currency, commodity and rate markets appeared to be on the sidelines. This made the late-day couch all the more strange, because the lack of wider participation suggested that its impetus might have been a one-off rather than a broad, macro readjustment.

Which of these conflicting signals will the post-PCE sell-off or late recovery investors choose to embrace from here?

Here are the macro points that could shape price action in the coming week.

ISM non-manufacturing survey

The survey of services sector economic activity by the Institute of Supply Management (ISM) is expected to show that the dominant engine of US growth returned to expansion mode in May after a shock contraction last month. The main index is seen rising to 50.5 from 49.4, again crossing the 50 growth threshold.

Traders will keep a close eye on the inflation sub-index included in the data, which has tended to lead the CPI and PCE inflation readings by about two months. It hit a three-month high in April despite slowing orders and shrinking employment. Another month of steady price growth could reduce Fed rate cut bets, reducing risk appetite.

The decision of the ECB on the interest rate

European Central Bank (ECB) is widely expected to start cutting interest rates this month. Futures markets are fully pricing in a 25 basis point (bps) cut at this month’s policy meeting. A total of 62 bps in stimulus is set for 2024, implying two benchmark-sized cuts and a 52% probability of a third.

With the move itself widely expected, traders are likely to focus on the tone and guidance presented at the press conference with ECB President Christine Lagarde following the policy announcement.

Leading purchasing managers’ index (PMI) data from S&P Global shows the currency bloc is recovering from the brief recession of recent years. He set in May the growth rate of economic activity at the highest level in 11 months. That has helped boost inflation, which unexpectedly rose to a three-month high of 2.6% year-on-year last month.

Markets may feel this sets the stage for a somewhat hawkish tone from Ms. Lagarde, where she tries to keep inflation expectations anchored by reducing the scope for stimulus even as the central bank starts to deliver it. A lot may already be priced in, so a favorable surprise exit could be more impactful for markets.

US employment data

The May edition of official US labor market figures gets top billing on the weekly economic calendar. It is expected to show that the economy added 180,000 jobs last month, while the unemployment rate remained at 3.9%. Such results would fall broadly within the pace of job creation that has prevailed for nearly a year.

Analytics from Citigroup reveal an uptick in US economic data results over the past two weeks, accompanied by strong May PMI data. If that portends a strong windfall, a sharp revision to expectations for a Fed rate cut could weigh on stocks, bonds and precious metals as the dollar pushes higher.

Ilya Spivak, delicious head of global macro, has 15 years of experience in trading strategy and he specializes in identifying thematic movements in currencies, commodities, interest rates and stocks. Hey host Macro money and co-hosts overtime, Monday-Thursday. @Ilyaspivak

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