Markets still driven by stagflation fears

The April US jobs report was good with 428k new jobs and a slight slowdown in wages, but this did not stop long rates from continuing to rise (US 10y at 3.13%) and equities from falling, with the US indices recording their 5th consecutive weekly decline, something that has not happened for 11 years. The drop in the participation rate could indicate that many people who left or lost their jobs during the Covid crisis will not return to the labour market and that wage increases of more than 5% yoy will continue. The Fed has confirmed that it is set to tighten policy sharply after last week’s 50bp rate hike and the fact that the BoE is looking at a recession for the UK economy in 2023 confirms that this monetary tightening will not be without consequences.

Chinese imports merely stagnated yoy in April, which is a lesser evil than expected, but the trend remains clearly downward and export growth has slowed very sharply to +3.9% yoy. The anti-Covid policy continues to be a major drag on activity and is reinforcing shortages in the global industry.

The economic calendar is light today. Inflation will continue to dominate the markets this week with the release of the US figures for April (Wednesday) which could confirm that the high point has been reached, but there is very little chance that this will change the Fed’s policy in the short term. The USD is slightly stronger in the context of risk aversion: the EUR/USD is testing the 1.05 support again.