US-Iran Deal Paves Way to Reopen Hormuz – BoJ Hikes to 1.0%

In Focus Today

The US-Iran deal is in the spotlight after a series of overnight updates. The agreement has effectively been signed, ending the US naval blockade of Iranian ports, reopening the Strait of Hormuz and launching 60 days of nuclear talks. Trump said ships are already moving and Hormuz will be fully open by Friday, though mine clearance will take time. Passage is expected to be toll-free for at least 60 days, with Iran and Oman managing the strait thereafter. Details remain unclear, and Israel’s leadership and Hezbollah’s ongoing attacks underscore persistent regional tensions.

In Sweden, the NIER releases its economic forecast, providing an update on consumer and business sentiment and, crucially, new information on price plans, which are highly important for the Riksbank.

In Germany, the ZEW survey is released and will provide a first assessment of sentiment in June. Though it remains at low historical levels, the May survey was slightly better than expected as expectations improved.

Economic and Market News

What Happened Overnight

In Japan, the Bank of Japan (BoJ) raised its policy rate by 25bps to 1.0%, the highest level since 1995. The vote split was 7-1, with Governor Ueda absent due to hospitalization. The BoJ signaled further rate hikes and outlined a gradual reduction in JGB purchases, effectively pausing quantitative tightening from 2027. Market reaction was modest, leaving USD/JPY just above 160 and keeping intervention risk alive ahead of tomorrow’s FOMC meeting, with Deputy Governor Uchida now in focus.

China’s latest monthly releases underscored a deepening two-speed economy. Retail sales fell from 0.2% y/y in April to -0.6% y/y in May, while property investment slumped further and new home prices continued to decline, although sales appear to be stabilizing. In contrast, industrial production accelerated to 4.5% y/y from 4.1% y/y. The figures argue for more consumer stimulus, but Beijing may refrain as external demand and technology continue to underpin growth and deflationary pressures have eased.

In Australia, the RBA left its policy rate unchanged at 4.35%, in line with market expectations. This follows a 25bp hike in May, the third increase in 2026, as the RBA responds to persistent inflationary pressures. Higher energy prices linked to the Middle East conflict and broader capacity pressures are key drivers. The unemployment rate rose in April, although other labour market indicators remain relatively resilient, while growth in consumer spending is slowing.

What Happened Yesterday

ECB speeches: Lagarde described the US-Iran ceasefire as “good news” if confirmed, potentially easing energy tensions, but warned that key issues remained unresolved. Nagel saw no near-term relief for euro area inflation, noting that oil supply normalization would take months and keeping all rate options open. Kazimir stressed that oil-related damage could not be reversed quickly and signaled that further monetary tightening was likely.

In Sweden, unemployment measured by the Labour Force Survey rose to 8.8% in May from 8.5% in April. The survey has become increasingly volatile, and Statistics Sweden has noted that non-response composition may have led to overestimated unemployment in March and underestimated employment in March and April. By contrast, the Public Employment Service’s less volatile statistics have shown unchanged unemployment for five consecutive months.

Equities: Who would have imagined European equities underperforming on the day of the Iran peace headlines? However, that is exactly what happened. European equities started strongly only to grind lower throughout the session. By the closing bell, the Stoxx 600 was only 0.2% higher. Rate-sensitive sectors and styles underperformed; banks outperformed real estate, large caps outperformed small caps, and so on. This was not the textbook reversal where companies most negatively affected by higher energy prices or rates staged the strongest rebound. Instead, the sector rotation was more consistent with cyclical outperformance funded by defensives, reflecting the surprisingly limited reaction in bond markets.

The limited reaction in European equities stands out even more in contrast to the much stronger move in US markets. There, equities ended sharply higher with the S&P 500 gaining 1.7%, helped by a rebound in technology shares, while consumer discretionary, materials and industrial stocks also advanced around 1%. Memory and semiconductor names rallied strongly, with Micron, AMD and Lam Research gaining around 10% in a single session.

FI and FX: The BoJ hiked rates by 25bps to 1.00% as expected, the highest policy rate since 1995, and signaled further hikes ahead. USD/JPY showed very little reaction and continues to trade above the 160 threshold, as the move was widely anticipated. Brent crude is trading broadly unchanged around USD 83/bbl. European rates stabilized yesterday after the initial rally, while US Treasury yields have started to move higher again this morning, with the 10-year yield back near Friday’s closing levels. China published a batch of data showing a concerning picture of weakening consumer demand. Trump and JD Vance have signed an electronic copy of the memorandum of understanding, although very few details of the agreement have been released.