US rate fears dim

Economics

Apart from the Fed decision (25 basis points as expected), the key event was the employment report in the US. Figures were weak and reinforce our outlook for slowing consumer demand and less interest rate hikes compared to the recent market consensus.

This week we expect the US non-manufacturing ISM survey for June to stabilise around record highs. Wholesale inventories are expected to pick in May after a weak April.

In Europe, German industrial production and orders should have continued to expand in year-on-year terms. The Bank of England is expected to keep monetary policy unchanged.
In Japan the leading indicator for May should remain near cyclical highs while machinery orders are expected to show robust growth in yoy rates.

Foreign exchange

The dollar-euro outlook remains higher towards 1.2350 provided that the long-term support line, which currently lies at 1.1950 holds.
The dollar-yen tested its May-June downtrend line at 109.50 and didn't overcome it. This keeps the trend down with 106.10 as next candidate support.

Fixed Income

Weaker-than-expected economic figures (especially regarding the employment report) and a moderate optimism implicit in the Fed comments pushed bond yields down both in Europe and the US. This week economic data is not expected to be a main driver and we see a stabilization around these lower levels (see table above).

Equities

The Fed-meeting outcome could be labelled as a non-event for the equity markets. Greenspan's comments however drove markets down as investors interpreted them as an indication that the pace of future economic growth might be questioned.

In addition, the release of mixed economic figures, some profit warnings and very disappointing vehicle sales weren't helping equity markets either. We remain convinced that a turn towards defensives is still in the cards.