ECB Hikes As Expected, One More Likely in September

In focus today

UK April GDP is released today. PMIs suggest the economy remained in growth territory in April and only slowed in May, although market consensus expects GDP in April to decline further from 0.3% m/m in March to -0.1% m/m in April.

Euro area final inflation estimates for May are released from Germany, France and Spain, where we expect the print to confirm flash estimates. The flash prints showed headline inflation rising mainly on the back of energy with Germany coming in slightly below expectations.

Also in the euro area, we have ECB’s Kocher, Rehn and Nagel giving speeches, where we look for further details after yesterday’s meeting.

In the US, consumer sentiment will be in focus, as the University of Michigan preliminary index for June is released. The index came out on the weak side in May as it was revised down in the final print to 44.8 from 48.2 vs. consensus at 49.5. The index is expected to rebound slightly to 46.0 in June.

Economic and market news

What happened yesterday

In the euro area, the ECB hiked policy rates by 25bp as expected, bringing the deposit rate to 2.25% at the June meeting. Lagarde highlighted the robustness of the decision to hike rates across a range of scenarios, downplayed growth risks, and emphasised upside risks to the inflation outlook. Looking ahead, we now expect the ECB to deliver its second hike to 2.50% in September (prev. July). We maintain our call for two cuts in H1 2027. For more see ECB Review: A robust hike, one more to come, 11 June.

In the Iran-war, President Trump said the US and Iran have agreed the final points of “a great settlement of the war with Iran” and could sign a peace deal “very soon, maybe over the weekend in Europe”, which would reopen the Strait of Hormuz to shipping and halt planned US strikes according to Trump. Iran countered that a deal had not yet been finally agreed upon. Markets reacted to the perceived de‑escalation with Brent crude falling to around USD 89/bbl and equities up.

In Norway, the Regional Network Survey came in on the soft side. Capacity utilisation fell from 32% to 30% and recruitment difficulties dropped from 21% to 18%. Growth, employment and investment all came in below Norge’s Bank’s March MPR forecasts. The only exceptions were wage growth for 2027, which is expected at 4.1% compared to 3.9%. Together with yesterday’s CPI, the survey reduces the probability of a rate hike next week and our base case thus remains that we have hit a peak in policy rates in Norway already now.

In Sweden, the final May inflation figures largely confirmed the flash estimate, revised down only slightly at the second decimal. The upside surprise that we saw in the flash estimate stems from package holidays, which increased 25.8% m/m, which is unusually early, as the seasonal price increase typically does not occur until June. Statistics Sweden also released the new measure of CPIF ex energy with constant taxes, alongside the latest figure for CPIF with constant taxes, both of which will be key inputs for the Riksbank’s assessment of underlying inflation pressures and the policy outlook next week.

In the US, May PPI came in at 1.1% m/m SA (from: 1.1%), largely driven by gasoline prices surging 23.4% m/m. While core PPI appeared to surprise to the downside at 4.9% y/y (from 5.2%), this was distorted by the volatile trade services category. Excluding this, core PPI grew 5.1% y/y (from 4.4%) and 0.8% m/m SA (from 0.6%) and suggests that cost pressures are building more broadly across goods and services. Overall, the report was more hawkish than the CPI print earlier in the week, and US yields ticked slightly higher in response.

The Central Bank of Turkey left its 1W repo rate unchanged at 37% for the third consecutive meeting, as expected by markets.

Equities: Global risk sentiment was very constructive yesterday, with global equities rallying 1.3%. Cyclical stocks led the move higher, while defensives lagged at the bottom of the performance table, particularly energy suffered. That said, the trigger for the positive risk move happened after US President Trump announced that the US and Iran are close to reaching an agreement, potentially to be signed as soon as this coming weekend (where Trump turns 80 on Sunday). The deal is expected to focus on reopening the Strait of Hormuz and securing assurances that Iran will not further develop its nuclear weapons programme. Unsurprisingly, the prospect of such an agreement weighed significantly on oil prices and is now 4.6% lower since yesterday morning to trade at USD 88.8bbl. The S&P 500 finished up 1.8%, the Nasdaq gained 2.5%, and the Russell 2000 rose more than 3%. US equity futures are higher again this morning, and the same picture is evident across Asia. South Korea’s KOSPI stands out in particular, advancing more than 8%.

FI and FX: Yesterday’s session proved a proper rollercoaster. Initially, risk suffered as Trump threatened further strikes on Iran, pulling EUR/USD lower towards 1.15 and EUR/SEK above 11.00. However, as Trump suddenly announced a deal being agreed by the Iranians, risk completely turned around. EUR/USD shot higher towards 1.16 whilst rates declined and EUR/SEK closed the session around 10.93. The ECB hiked rates as expected, but any ensuing market reaction was drowned by the geopolitics. As any deal has yet to be confirmed by Iran, markets will likely continue to trade closely linked to geopolitical developments, as sentiment remains jittery.