UK DATA: DMP: Surprisingly strong expected employment growth
A mixed DMP report with realised employment growth soft but expected employment growth picking up surprisingly. Realised and expected price growth were broadly in line with previous values. The most notable part of this report is the expected employment growth, which puts a question mark over other recent data which showed the deceleration in the labour market if anything picking up pace. This is also clearly in contrast to the PMI data. Of course the single month data here are not a full sample - so the MPC will be careful not to overinterpret this data and will have another DMP reading before the MPR and their next policy decision, anyway.
- Realised employment growth fell 0.1%Y/Y on the single month measure in June (first fall since January). More significantly the 3-month average fell to 0.3%Y/Y - the lowest level since September 2021.
- However, expected employment growth picked up 1.1%Y/Y in the single month measure (highest since the October 2024 Budget). This followed 3 months of 0.2-0.3% readings and is surprisingly strong. The 3-month average picked up to 0.6%Y/Y from 0.3% in the 3-months to May and a low of 0.0% in the 3-months to January.
- Realised price growth in June was 3.5% on the single month measure (it has been 3.4% or 3.5% for 3 months now). The 3-month average has also remained at 3.5%Y/Y for 3 consecutive months.
- Mean expected price growth picked back up to April levels at 3.7% after a dip to 3.5% in May. However, the 3-month average is still a tenth lower than last month at 3.6% (down from a peak of 4.0% in February - and lowest since the October 2024 Budget).
- "Over two-thirds of firms reported that changes to US trade policy would have no material impact on their firms. In June, 29% of firms expected sales to be lower in the year ahead as a result of US trade policy changes and 24% of firms expected that their capital expenditures would be lower. On prices, 19% of firms expected that their average prices would be lower, while 12% expected that their prices would be higher as a result of the tariff changes."
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EGBS: Goldman See Limited Room For OAT Outperformance Vs. Southern EGBs
Goldman Sachs continue to be “positive on Eurozone sovereign credit as ECB easing and German fiscal matters provide an effective policy put on a cyclical and medium-term horizon, respectively”. However, amid increasingly tight valuations and small carry cushion, they believe EGB compression vs. Bunds “will be harder to engineer going forward, requiring fresh positive catalysts, or the sustained absence of negative catalysts”.
- They highlight that “the last year has seen OATs catch-up to fair value based on debt metrics, limiting the scope for outperformance vs southern peers despite trading much cheaper vs. respective history”.
- Looking forward, Goldman suggest that “rather than outperformance, what is at stake for OATs is the ability to continue to trade on broader European risk. This underscores the importance of policy continuity as a way to crowd-in global portfolio flows and to activate the safe-haven properties of European fixed income at this juncture”.
FOREX: FX OPTION EXPIRY
Of note:
EURUSD 1.2bn at 1.1395/1.1400.
USDCAD 1.05bn at 1.3700.
AUDUSD ~1bn at 0.6400/0.6415.
EURUSD ~1bn at 1.1400 (wed).
USDCAD 1.68bn at 1.3725/1.3750 (wed).
EURUSD 2.24bn at 1.1400 (thu).
USDJPY ~1bn at 143.00 (thu).
EURUSD ~1bn at 1.1400 (fri).
- EURUSD: 1.1348 (1.16bn), 1.1350 (2.05bn), 1.1395 (307mln), 1.1400 (954mln), 1.1450 (871mln).
- USDJPY; 143.00 (581mln).
- USDCAD: 1.3700 (1.05bn).
- AUDUSD: 0.6400 (311mln), 0.6415 (672mln).
EUROPEAN FISCAL: French Fiscal Consolidation Intact; More Proposals Due In July
The 10-year OAT/Bund spread is currently ~67bps. That’s still well above the 40-50bps range seen before the snap Legislative Election announcement in May 2024, but below the 70bp handle that provided a floor for the spread through much of H2 2024 and Q1 2025.
- An unwind of immediate domestic political risks and post-Liberation Day tariff concerns has been supportive of spread narrowing, However, markets should still be cognizant that the Bayrou administration is held up by fragile cross-party agreements, which could unravel if future policy proposals ostracize one- (or both) end of political spectrum.
- The French budget deficit was E69.3bln in April, compared with E91.6bln in the same month last year. The improvement relative to 2024 was due to higher tax revenues (E99.6bln vs E69.7bln a year ago). The press release notes that “this difference is explained by the absence of recording of certain revenues collected at the end of April 2024, due to the temporary closure of the Chorus application” (Chorus is a government portal used for business-to-government transactions).
- Despite this caveat, current YTD tracking suggests budget consolidation continues to progress. However, more fiscal tightening is expected to be delivered for the administration to meet its 5.4% 2025 and 4.6% 2026 budget deficit targets.
- Speaking to BFM TV last week, Bayrou noted that the government will seek E40bln in spending cuts in the next budget, for which proposals will be presented in early July. It is unclear at present what measures might be included as part of the package. Bayrou did add he "could take up" the issue of "social VAT", which consists of compensating for reductions in contributions weighing on employment by increasing VAT."
