Euro Area Inflation Beat Expectations

In focus today

Today in the US, we get the May ISM Manufacturing index at 16.00 CET. Its PMI-counterpart released earlier shifted modestly higher, but the leading new orders indices still pointed towards muted growth.

In Sweden, we get the manufacturing PMI for May at 08.30 CET. It is set to continue higher from last month’s 51.4, as suggested by the order/inventory-spread reaching its highest level since mid-2021. Notably, it was primarily export orders that were strong in April, with the sub-index rising from 49.9 to 54.6. Domestic orders are also on a rising trend, but the sub-index remained below the 50-mark coming in at 49.4 in April.

For the rest of the week focus will turn especially to the euro area and the ECB, where we expect the ECB to cut interest rates by 25bp on Thursday, thus lowering the deposit facility rate to 3.75%. In the US focus will be on the job market as we get the JOLTs for April on Tuesday, ADP report on Wednesday, and NFP report on Friday. On Wednesday we also get the ISM non-manufacturing figures. The Bank of Canada as well as the Polish central bank will also both convene Wednesday and announce their rate decisions.

Economic and market news

What happened overnight

In China, the Caixin manufacturing PMI for May was released overnight. The figure printed at 51.7 (prior: 51.4), thus beating the expected 51.5, and remaining in expansionary territory (above the 50.0 mark), as it has been since November last year. In fact, the figure has not printed as high since June 2022.

Interestingly, this is somewhat the opposite of what was seen last week with the NBS manufacturing PMI, which unexpectedly dropped to 49.5 from 50.4, thus falling into contractionary territory. The Caixin figure has generally been stronger than its official NBS counterpart, and the two figures do not always follow one another on a monthly basis.

There was also Manufacturing PMI data from other Asian countries such as South Korea and Japan. Here the data also showed an improved outlook for the Asian manufacturing sector.

The Asian equity markets responded positively to the data with gains across the region. The Indian equity market was up on the back of the widely anticipated victory for PM Modi at the general election which concluded yesterday (see more below).

There were modest gains in the Asian bond markets this morning with a small decline in bond yields.

Oil is flat this morning with Brent trading around USD81/bbl. This comes after OPEC+ announced an extension and phasing-out plan of their voluntary production cuts yesterday. Whereas the extension of the cuts was expected by most market participants, the phasing-out scheme was news. However, commenting on the plan after the meeting, Saudi Arabia’s oil minister said that they would maintain their ‘cautious and pre-emptive approach’, which could entail ‘pausing or even reversing the phase-out of the cuts’ if deemed necessary.

What happened on Friday and over the weekend

In the euro area, HICP headline for May inflation came in slightly higher than expected at 2.6% y/y (prior: 2.4%), whereas consensus expected 2.5%. The higher-than-expected inflation was in line with the signals from the country data released before the aggregate print. Core inflation also printed higher than expected at 2.9% y/y (prior: 2.7%). Consensus expected 2.7% y/y. Service inflation once again came in very strong rising to 4.1% y/y from 3.7% y/y. The monthly increase in seasonally adjusted service inflation was around 0.5% m/m for the second consecutive month.

Overall, the inflation print for May confirmed the picture we have seen over the past months of a strong underlying pressure on inflation from service prices. The sticky services inflation is a key reason for the ECB to await more data before embarking on a series of rate cuts not counting the all-but-promised cut on Thursday 6 June, which we see as a roll-back of the ‘insurance hike’ from last September.

Going forward, we expect that euro area inflation will hover around 2.5% over the next couple of months due to rising energy inflation and sticky services inflation. After summer, we then expect headline inflation to hit the 2% target in some months due to energy base effects, but the sticky underlying inflation means that we expect inflation only to sustainably converge to the 2% target during 2025.

In the US, the Fed’s favourite price gauge, the PCE price index, showed headline inflation for April standing at 2.7% y/y and 0.3% m/m both unchanged from the month prior and in line with expectations. As for core inflation, it stood at 2.8% y/y and 0.2% m/m. Whereas the annual rate was unchanged from the month prior and in line with expectations, the monthly rate came in lower than the 0.3% m/m consensus had expected according to a poll by Reuters. However, on a double-digit note, the measure stood at 0.25% m/m, hence it came very close to consensus. With the PCE inflation figures we also received April figures for the real personal consumption volume which stood at -0.1% m/m, down from the revised March figure of 0.4% m/m.

In India, prime minister Modi’s party looked set to win big in the Indian general election according to exit polls, pointing to Modi securing a third five-year term as prime minister. The National Democratic Alliance led by prime minister Modi’s party, the BJP, was projected to improve on their current absolute majority from 2019 of 353 seats by securing between 353 and 401 seats out of the total 543 seats in parliament. Modi’s party alone accounted for 301 in the alliance after the 2019 election, and 3 out of 5 exit polls predicted the prime minister’s party would improve on this. Despite somewhat ‘patchy’ track records of polling agencies in India, often claimed to be due to the vast size and large diversity of the country, prime minister Modi went on X (previously Twitter) saying that he with “confidence [could say] that the people of India have voted in record numbers to re-elect the NDA government”. Results of the election will be expected on 4 June.

In France, the S&P rating agency downgraded France to an AA- credit rating from AA. The S&P said in their announcement the downgrade was due to higher projected debt-to-GDP ratios than previously expected, as they now forecast a ratio of 112% in 2027 up from 109% in 2023. Likewise, they also foresee a higher budgetary deficit in 2027 of 3%, after a higher-than-expected deficit in 2023 of 5.5%.