PCE Core Rise to Fuel Rate Hike Bets

In focus today

• In the US, today’s main data focus will be on the May PCE. Consensus and the Kalshi prediction market expect that core PCE was 0.3% m/m in May with a tilt towards 0.4% m/m. A rise in PCE core inflation in conjunction with Warsh’s hawkish inflation stance may further underpin the expectation in the market of a rate hike over the coming months.

Economic and market news

What happened overnight

In commodities, Brent crude plummeted yesterday, trading around USD72/bbl. this morning and close to the pre-war levels. While much attention in the oil market remains on the supply situation, we think the stronger USD and associated growth worries are behind the drop. The hawkish turn by the Fed and rosier supply outlook have created a bearish environment for oil. While the USD rally has come a long way, traffic through the Strait of Hormuz remains low. Hence, oil prices could potentially fall further as global supplies normalise.

What happened yesterday

From the ECB, Schnabel was on the wire and stated that the euro area economy remains relatively resilient but warned that a ceasefire is no reason for the ECB to let its guard down. She highlighted rising risks of second-round inflation effects and said that war, inflation and growth will determine the timing and scale of any rate increases. Schnabel argued that ECB interest rates are not yet restrictive and, from today’s perspective, further hikes are needed to bring inflation back to 2%. We forecast only one more rate hike in September and expect the ECB to revert to cuts in H1 2027.

In Sweden, the Riksbank Minutes did not really provide any major surprises, although it is worth emphasizing that the Minutes were more dovish than the MPR. However, given the developments post the cut-off date for the draft report (i.e. The MoU between US and Iran), this dovish shift makes good sense. The balance within the board remains the same. Inflation risks are still seen as elevated and largely driven by global factors, but domestic indicators now point to broader price pressures. Even so, most Board members think that current low inflation and weak resource utilisation mean it is best to keep policy unchanged for now and wait for more information.

In Germany, the Ifo report for June came in broadly as expected with a rise to 85.6 (cons: 85.5, prior: 85.0). The assessment of the current situation rose to 87.0 (cons: 86.3, prior: 86.1) while expectations declined to 84.1 (cons: 84.8, prior: 83.9). The assessment of the current situation is thus back slightly above the level seen before the war in Iran while expectations remain weaker. The dire picture of German activity in June from Tuesday’s PMI report was thereby not corroborated by the Ifo indicator.

In Norway, the latest figures from the Norwegian Labour Force Survey show that the registered unemployment rate fell to 4.4% in May from 4.6% in April, while the trend-based rate remained stable at 4.8%.

Equities ended marginally lower yesterday, led down by energy and materials, but the headline move again concealed very wide dispersion across sectors and regions.

This is not a clean risk on or risk off market. It is a market dominated by two forces: the earnings outlook for technology and the impact of the violent moves in oil.

Despite the modest index decline, five sectors closed higher, and it is worth noting that both consumer discretionary and consumer staples advanced as the implicit consumer tax from oil has fallen sharply, with Brent now back around pre conflict levels.

At the same time, the technology earnings narrative was strongly validated by Micron, where results and guidance beat already elevated expectations and triggered a clear relief move across AI and memory related exposure.

In our view, being on the right side of these two drivers, oil relief and technology earnings resilience, is the key to outperforming in the coming period.

This morning, the Micron relief rally is playing out across Asia, with Japan and South Korea leading gains, while US and European futures are mostly higher, led by US technology.

FI and FX: The sell-off in EUR/USD continued yesterday, and the cross fell below 1.135. Last week’s hawkish turn by the Fed remains the key driver of current USD strength and decline in EUR/USD. EUR/DKK rose further to 7.5758 yesterday amid continued sour risk sentiment in financial markets. We took advantage of the strong USD momentum and decided to close our long USD/SEK recommendation from late May at 9.7800, for a profit of 5.8% (excluding carry). Yields declined in a broad-based fashion in a bullish flattening of the curve. 10Y Bunds broke firmly below the 2.90 mark while 2Y Schatz dropped to around 2.55%. Similar price action was evident in the US with a significant flattening of the 2Y10Y US yield curve.

Please note that the Danske Morning Mail will be on summer break from 29 June to 31 July.