In focus today
After yesterday’s hawkish surprise from Norges Bank, we revise our call for the first rate cut to come in March 2025 rather than September this year, see more below.
This morning at 8.00 CET we get UK retail sales for May and later in the day June PMIs where consensus is for status quo (comp. PMI consensus: +0.01).
In the euro area, we get the data highlight of the week with the June PMIs. The composite PMI has now been above 50 for three months in a row and we expect this to be the case also in June as the economy has gathered momentum. The service sector is holding up growth and we expect the services index to be broadly unchanged at a still strong level. We expect the recovery in the manufacturing sector to continue as most of the cyclical factors explaining the recent weakness have turned the corner. We will also follow the service sector price index closely to see if the recent declines continue in June as an indicator for inflation.
In the US, we expect the June flash PMIs to signal positive but still modest growth. May data showed an unexpected pick-up in business activity especially in the services sector, while price indicators remain close to pre-pandemic average levels.
Economic and market news
What happened overnight
Japanese May core CPI printed at 2.5% y/y, slightly lower than expected (cons.: 2.6%) while core CPI excl. energy declined to 2.1% y/y from previously 2.4%. Hence no new evidence for the BoJ that demand-driven price pressure is strong, which could cloud the outlook for monetary policy. The yen initially slid against the dollar but recovered losses during the session.
What happened yesterday
A hawkish surprise from Norges Bank, who shifted guidance on the most likely timing for the first rate cut from September this year to March next year. Markets expected a shift to December and reacted by flattening the forward rate curve and strengthening the NOK (EUR/NOK -0.7%) though still pricing in a roughly 50/50 chance of a December cut. We change our forecast to be in line with the path set by NB and now see the first cut in March 2025.
The SNB cut rates by 25bp to 1.25%. The cut today is likely due to the recent CHF strengthening as was also the focus of the press conference, where Chairman Jordan noted that the exchange rate is very important for monetary conditions. EUR/CHF tracked some 0.5% higher during the day. We stick to our call of an end-of-year rate at 1.00% with today’s meeting not proving a gamechanger but highlighting the more frontloaded nature of the SNB.
Slightly dovish tilt from the BoE, who kept the bank rate unchanged at 5.25 as expected but comments from the “unchanged” voting camp downplaying the recent topside surprises in services inflation. EUR/GBP ticked slightly higher during the day and yields posted a modest decrease.
Market movements
Equities: Global equities were flat yesterday with notably mixed regional and sector performance. Europe emerged as the significant gainer, boosted by a catch-up in both France and Italy. Most sectors in Europe saw gains. The US, however, presented a more mixed picture. Tech stocks in a sizeable sell-off for a change, with the Dow outperforming the Nasdaq by 1.5%. Industrial value began to somewhat recover from its massive underperformance against tech growth recently. From a value and investment cycle perspective, this development makes a great deal of sense. However, it’s too early to determine whether this signifies the beginning of a trend shift. In the US, the Dow rose by +0.8%, while the S&P 500 fell by -0.3%. The Nasdaq and Russell 2000 also dipped, with decreases of -0.8% and -0.4%, respectively. Asian markets are quite varied this morning, with South Korea and China standing out on the negative side. Meanwhile, futures in the US and Europe are trending higher.
FI: EGB rates rose marginally in yesterda’’s session with limited volatility throughout the day. 10Y Bund yields rose 3bp, while long-end yields for peripheral and OATs were close to unchanged. The Bund ASW-spread was close to unchanged at 36-37bp, while implied volatility continued to fade.
FX: CHF was the poorest performer in G10 during yesterday’s session as the SNB delivered its second 25bp cut this year. While the BoE kept the Bank Rate unchanged as widely expected, a slight dovish tilt in communication provided headwind for GBP. Among the top performs was NOK, where Norges Bank delivered a hawkish surprise by postponing the signal for the timing of the first rate cut one additional quarter compared to market expectations (September 2024 to March 2025).
