May was a true rollercoaster, the Fed meeting kicked off the month on the 1st day, where Chair Powell quoted “the bar to hike is high”, capping hawkish expectations and transferring pricing to a more bullish asymmetric path. In data, both ISM manufacturing and services were sub 50 along with a weaker employment component in services. These along with a below expectation NFP two days later, sent the market into a buying frenzy, unwinding much of the April selloff. The ball was then in CPI’s court, and yet again core PCE failed to provide the Fed with a starting pistol for cuts, pushing pricing from September more towards December. A reversal of the previous 2 weeks rally drove yields back up close to their highs helped along by a series of UST auctions tailing badly. Elsewhere; the Swedish Riksbank cut 25bps as promised after a period of weaker data had swung their narrative dovish, and UK prime minister Rishi Sunak dissolved parliament and called a snap election for July.
The data is choppy, and the market reflects this, with poor performance from directional macro in particular. The soft landing continues to look shallow and in turn challenges the inversion of curves. We expect this trend to continue as the estimate of long run neutral rate is revised higher due to months of sticky inflation and robust payroll numbers taking their toll on pricing. The result is that long duration is still in danger of being a false flag and performing poorly when cuts eventually arrive.
The US 10y closed the month 18bps lower and 5s-30s swap was 7.5bps steeper.
