ECB Hike Expected With Focus on Signals

In focus today

As the main event of the week in Europe, we expect the ECB to hike the deposit rate by 25bp to 2.25%, in line with consensus and markets. With the June hike fully priced in by markets, all focus during the press conference will be on signals. We expect Lagarde to keep full optionality on the future policy rate path, including a potential summer hike, but without pre-committing. Looking ahead, we forecast a final 25bp hike in Q3, bringing the deposit rate to 2.50%. For details see ECB Preview – And so, the hiking begins, 4 June.

In Norway, we expect the Regional Survey to confirm the impression of a weaker growth outlook and lower capacity utilization, including a drop in the indicator of labour shortage. If proven right, the probability of a rate hike next week should probably remain well below 50%.

The full batch of May inflation figures is released in Sweden today. Since the flash estimate last week showed a sizeable upside surprise in core inflation (0.5% vs 0.2% expected), driven mainly by services, the risk profile for coming prints has shifted to the upside. Today’s release also includes the official series for CPIF ex energy with constant taxes, requested by the Riksbank. This new measure will be key for assessing underlying inflation pressures and the policy outlook, depending on how persistent the strength in services inflation is.

The US releases May PPI in the afternoon. Markets expect PPI to increase 0.7% m/m SA, moderating from the 1.4% m/m SA recorded in April, though upward pressure is expected to persist. On a yearly basis, markets expect PPI to tick up further to 6.4% y/y (April: 6.0%).
The Central Bank of Turkey releases its rate decision, where markets expect them to leave the 1W repo rate unchanged at 37.0% for the third consecutive meeting.

Economic and market news

What happened overnight

In the Iran-war, Iran’s Revolutionary Guard declared the Strait of Hormuz closed and threatened to target any vessel attempting to transit, reporting that two ships were fired upon, although US Central Command said commercial traffic “was continuing to transit in and out of the Strait”. While the US launched new strikes on Iranian military assets inside Iran, Iran claimed drone and missile attacks on multiple US bases in Kuwait, Bahrain and Jordan. Oil prices rose on the news, with Brent crude almost at USD 95/bbl.

For the US-Mexico-Canada agreement, Donald Trump has signalled he is “not looking to renew” the agreement at its 1 July review deadline, raising the prospect of annual renegotiations rather than a 16-year extension. He argued the US “doesn’t need” imports from Canada or Mexico and should run trade surpluses with both. Major US carmakers are heavily exposed to the deal given continent-wide supply chains, while the US also imports fertiliser and energy, including oil and electricity, from Canada.
What happened yesterday

In the US, May CPI came in broadly as expected, with headline inflation at 0.6% m/m SA (4.2% y/y) but core slightly softer at 0.2% m/m SA (2.9% y/y). Under the surface, health care lifted core, while most other categories, including food, looked relatively soft. Wage growth was around 3.4% in May, below headline inflation, implying that consumers’ purchasing power has declined over the past year. Overall, the data does not yet point to a broad-based pass-through of higher input costs to consumers. The print should ease immediate inflation concerns, arguing against an urgent need to accelerate the hiking pace.

In Norway, core inflation came in at 3.4% y/y in May (cons.: 3.3%, Norges Bank forecast: 3.3%), thereby surprising to the topside. The print does increase the probability of a June hike, although “unchanged” remains our base case amid the inflation details on domestic components turning soft. Headline inflation printed at 3.1% y/y (Norges Bank forecast: 3.3%), though it is the core measure that is the most important for the near-term monetary policy outlook.

In Denmark, May inflation printed in line with our expectations at 1.9% y/y (April: 1.4%), driven mainly by a 7.6% y/y increase in electricity prices and normalisation of summer house inflation. Petrol prices increased 4.8% m/m, while diesel declined 2.9% m/m, however both remain well above last year’s levels. The largest surprise was food, which fell 1.3% m/m and now sits 0.3% below last year’s level, reflecting an intensifying supermarket price war.

In Sweden, GDP increased 0.5% m/m in April, above expectations and confirming strong momentum after the robust March print (1.9% m/m). At the same time, the entire monthly GDP series was revised up markedly. As a result, the level of GDP is now clearly higher than in the Riksbank’s latest forecast, which should support a higher rate path at the upcoming meeting. Household consumption, which is expected to play a key role in Swedish recovery, declined 0.8% m/m in April, but preliminary figures indicate a 0.7% m/m rebound in May.

In Canada, the Bank of Canada left its policy rate unchanged at 2.25% at the interim policy meeting today. They reiterated their preparedness to act if short-term effects from the war persists despite weak growth.

The Bank of Japan announced that Governor Kazuo Ueda has been admitted to hospital for medical treatment and will not take part in the 15-16 June policy meeting. Deputy Governor Ryozo Himino will oversee the rate decision in his absence, while Deputy Governor Shinichi Uchida will conduct the press conference afterwards. According to the Bank of Japan, Ueda is expected to attend the 30-31 July policy meeting.

Equities: Global risk appetite was weak again yesterday, with a sharp decline across major equity indices, with global equities down 1.3%. The S&P 500 declined 1.6%, while the Nasdaq fell 2.0%. Russell 2000 declined 1.1%. The rotation within equity was a classic defensive rotation on a risk off with min vol and value outperforming peers. Defensive sectors rose with the exception of health care. The materials and industrials were among the weakest performers, yet the much in-focus tech sector also dropped markedly. Unlike Tuesday, this was a semis-led tech decline. This morning, Asian markets are in the red, reflecting the tone set by US markets yesterday. US equity futures are marginally higher.

FI and FX: Trump grew tired of waiting for his ‘deal’ and has ordered new strikes against “multiple” targets in Iran overnight. In an interview following the strikes, Trump also added that the attacks would continue should a deal not be reached today. According to state-run TV in Iran, the Strait of Hormuz has been completely closed in response. Despite this escalation, price action through the night has been relatively modest although Brent crude is moving higher. Yields were torn between two directions yesterday, pulled higher by rising oil prices and lower by the modest downside surprise in US core CPI. NOK/SEK rose above parity again, as the NOK found support in higher oil prices whereas the SEK suffered from poor risk sentiment.