Markets on the rise ahead of potential BoC rate cut

• European markets on the rise after strong Spanish PMI release
• Australian GDP flags, although Chinese PMI brings grounds for optimism
• Looking ahead to ADP and BoC rate decision

Markets are on the rise in Europe, with the German DAX leading the way as the FTSE 100 struggles to gain traction. A raft of PMI surveys released over the course of the morning saw a sharp surge in Spanish services sector activity, with the gauge rising into a one-year high of 56.9. Coming at a time when we have grown increasingly aware of the outsized role being played by services sector inflation, this report provided cause for concern as rising salaries pushed up business costs once again. In the UK, the financials are back in the red once again, with European banks having seen significant selling pressure ahead of the potential ECB rate cut tomorrow.

Overnight GDP data out of Australia brought cause for concern at the RBA, with the 0.1% growth figure for the first quarter highlighting the flagging economic trajectory as the country struggles with elevated rates and stuttering Chinese demand. A high level of inventories helped avoid a flat or negative reading for the period, but that raises fears over the implications for growth in the event that this boost fades. For the RBA, this is unlikely to force a rate cut this year, but this floundering rate of growth does highlight the potential need to ease rapidly in 2025. Nonetheless, some more positive news came from China, with the Caixin services PMI rebounding to an impressive 54.0 for May. Strong services sector business activity and market demand helped push this PMI metric to a 10-month high, with employment rebounding back into growth after three months of contraction.

Looking ahead, today should see significant volatility as traders await the latest ADP payrolls and Bank of Canada rate decision. Coming off the back of yesterday’s sharp decline in the JOLTS job openings figure (8.06M), the expected decline in today’s ADP payrolls figure could further highlight the cooling of the US jobs market ahead of Friday’s main event. While the optimists are hoping for a FOMC rate cut in September, the Bank of Canada look set to take their first step towards monetary policy normalization today, with markets expecting a 25-basis point cut. While the Fed typically lay the path for others to follow, things look different this time around given the potential for both the ECB and BoC to kick off their easing cycle this week.