In focus today
We have three central bank policy decisions today, from Norges Bank (NB), the Swiss National Bank (SNB), and the Bank of England (BoE)
We expect the SNB to keep the policy rate unchanged at 1.50% today after delivering its first cut at the March meeting. The recent strengthening of the CHF poses the biggest risk to our call.
We expect the BoE to keep the Bank Rate unchanged at 5.25% today with 7 members voting for unchanged and 2 members for a cut. We expect little change in communication and expect the first 25bp cut to be delivered in August. See more in Bank of England Preview, 14 June.
We expect NB to keep the policy rate unchanged at 4.50%. Since the bank first signalled a 25bp September cut back in March, economic growth has picked up compared to what was expected while global rate expectations have adjusted upwards, reducing the room for manoeuvre for Norges Bank. We therefore expect hawkish signals from NB and a reduced probability of a September cut.
In the euro area, we follow the June consumer confidence data in the euro area. Private consumption has been muted despite record-low unemployment, rising real incomes and strong savings. Weak consumer confidence is likely one of the reasons why we have seen this. Hence, it will be important to follow if confidence starts rising significantly.
Overnight, we get May CPI inflation from Japan. Price pressures have faded in the spring and started to look “Japanese” again, rhyming with less than 1% annual inflation. Regional data from Tokyo indicates more of the same in May. We are still waiting for the spring wage increases to kick in and boost consumers’ purchasing power and companies’ price setting.
Economic and market news
What happened yesterday
UK services inflation was slightly higher than expected in May at 5.7% y/y (cons.: 5.5), and monthly pressures remained elevated, which should continue to worry the MPC on the scale of easing we can expect this year. Headline and core were in line with consensus. Markets initially drove EUR/GBP lower but the cross ended yesterday’s session virtually unchanged. We continue to see the first 25bp cut in August followed up by November.
The EU opened excessive deficit procedures against 7 countries yesterday, with major economies such as France, Italy, and Poland in the mix. The countries now have several months to come up with proposals to improve public finances. No big market reaction was seen as this was largely expected given the data on public finances from these countries.
In the Middle East, fears grew of an escalation of the conflict between Israel and Hesbollah in Lebanon after news that the IDF have approved a plan for an offensive into the country. The fears of further escalation in the region kept oil prices elevated during the day despite a US report of rising inventory levels, with the Brent at around 85.33 USD/bbl.
Market movements
Equities: Global equities rose yesterday, lifted by the Far East, although Europe was lower, and the US market was closed for a holiday. Looking at sector rotation in Europe, we continue to see some recovery after last week’s significant drop in several European banking stocks. Material stocks also outperformed yesterday, buoyed by positive momentum in China. While we argue that the French and UK elections should lead to cautious risk-taking in Europe in the coming weeks, we also believe that the economic backdrop will dominate post-elections. Therefore, we recommend maintaining a cyclical tilt in portfolios. Asian markets are mixed this morning, as are European futures, while US indices are higher, led by the tech sector.
FI: Yesterday’s trading session was largely without significant market news. The early trading saw European yields lower (mirroring the late US trading session the day before). However, while France and Italy being put in the first step towards an EDP was widely expected, it seemed to be the trigger for a reversal of the gradual sell-off. As a result, 10y Bunds were virtually unchanged on the day, while France reversed some of the benign market dynamics from earlier this week as spreads widened 2bp.
FX: It was a fairly quiet day yesterday due to holiday in the US. EUR/GBP ended the day close to unchanged after service inflation came in higher than expected. Today, focus turns to the monetary policy decision from Norges Bank, the BoE and the SNB, where we expect”“unchange”” decisions across the broad.
