Today's US Payrolls could shape short-term momentum in yields and the Dollar

Markets

As expected, the ECB cut its depo rate by another 25 bps to 2.0%. More than ever, the question for markets was

what to expect next. Admittedly subject to a persistent high degree of event risk, conclusion is that the ECB might do

less than what markets were positioned for. Chair Lagarde indicated that the bank is getting closer to the end of its

policy cycle as ‘at the current level of interest rates, we believe that we are in a good position to navigate the

uncertain conditions that will be coming up’. In new forecasts, the ECB sees lower headline inflation this year (2.0%

from 2.3%) and in 2026 (1.6% from 1.9%). This is however mainly due to lower energy prices and a stronger euro.

Inflation is expected to return to the target over the medium term (2.0% in 2027). Growth is seen unchanged at

0.9% this year, result of a strong start of the year to be followed by weaker activity due to trade uncertainty later this

year. 2026 growth was slightly downwardly revised to 1.1%, fiscal measures (mainly in Germany) and a further rise in

real wages and employment will continue to support growth further out. With this base scenario, the ECB can switch

to a reactive, data/event driven approach. This at least suggests a pause in the easing cycle with the possibility of

ending it if trade‐related uncertainty would turn out less negative than feared. Yields initially still dropped on the

lower inflation forecast, but soon reversed course with German yields adding between 7.5 bps (2‐y) and 2.6 bps (30‐

y). Money markets still see about 85 % chance of one additional cut in September. Even so there is ever little reason

to push for sub 1.75% levels given yesterday’s communication. The euro during the press conference briefly spiked to

just below the 1.15 mark on higher yields and Lagarde referring to earlier analyses on a bigger international role

for the euro. However, a big part of this gain was returned later in the session. This was partially due to a dollar

comeback and a rebound in US yields. Both initially suffered after higher (247k) US jobless claims. However, both US

yields and the dollar later were supported, amongst others, by more constructive headlines on the US China trade

conflict after a phone call between US president Trump and XI Jinping. Some Fed comments also reinforced the

reigning wait and see bias. US yields in the end even finished between +6.8 bps (5‐y) and unchanged (30‐y). DXY

close little changed at 98.74. The euro maintained a minor gain (1.1445).

Even as the mainstream Fed‐communication still firmly holds the wait‐and‐see narrative, today’s US payrolls will

have to potential to decide on the short‐term momentum both in US yields and the dollar. Recently markets grew

ever more sensitive to softer than expected activity, and particular, labour market data. A weak figure might make

markets change their assessment on the timing (and the pace) of additional Fed easing later this year and early next

year. Consensus still sees near 125k of additional jobs in May, but the ADP report earlier this week suggests

downside risks. If those were to materialize, the US yield curve might bull steepen. The dollar in such an scenario

would be vulnerable with a the potential for EUR/USD to try a new attack on the 1.1573 YTD top.

News and views

The US Treasury in its semi‐annual currency report yesterday, the first since Trump’s second presidency, said that no

major trading partners have manipulated their currencies in 2024. It uses three criteria: a trade surplus with the US

of at least $15bln, a global current account surplus above 3% of GDP and persistent, one‐way net FX purchases. Only

when the three are met the country is possibly (but not necessarily, eg. Switzerland in 2022) labeled as such. Meeting

two of those criteria will get you on the so‐called monitoring list. Ireland and Switzerland were added to that list in

yesterday’s report, along with Germany, Japan, South Korea, Singapore, Taiwan, Vietnam and China.

The Reserve Bank of India (RBI) lowered the key interest rate by a more than expected 50 bps to 5.5%. With the cut

comes a change in the monetary policy stance to neutral from accommodative. Economic growth remains slower

than hoped‐for against the backdrop of a challenging global environment. The RBI nevertheless kept its GDP forecast

for the fiscal year 2026 at 6.5%, buoyed by domestic demand. Risks are tilted to the downside. The inflation outlook

was revised downward to 3.7% from 4%, potentially explaining the RBI’s stance shift back to neutral. The RBI a bit

later unexpectedly slashed the cash reserve ratio to 3% from 4%, releasing an estimated INR 2.5tn by the end of

November, according to RBI governor Malhotra. The bigger rate cut, the unexpected cash reserve ratio cut and

switch in policy stance caused wild swings in the bond market. The 10‐yr yield tumbled 12 bps initially only to reverse

course (twice) and trade virtually unchanged. The Indian rupee reacted way more calmly around USD/INR 85.8.

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