Sunset Market Commentary

Markets

The European May PMIs painted a gloomy picture, putting the economy on track for a quarterly decline by 0.2%. The composite indicator fell to a 31-month low of 47.5. The decline was driven both by manufacturing and services. The former still eked out growth (51.4) but the momentum created by anticipative buying (ahead of price increases and supply disruptions) is waning. Services activity on the other hand tumbled to a 5-year low (46.4), hit hard by the surge in the cost of living. New orders contracted across sectors, resulting outstanding business being reduced to the largest extent since end 2024. Staff reduction overall was the sharpest since August 2013 (excluding the pandemic). The Middle East conflict left clear traces through sharply lengthening supplier delivery times and continued rising prices pressures. Input cost inflation rose to a 3.5 year high while prices charged rose at their fastest pace in 38 months. The survey owners say the price gauges correspond with inflation running close to 4% in coming months. The impact of high energy prices is clearly visible and ties the hands of the ECB, at least according to markets. The ECB at the April policy meeting was seen as laying the groundwork for a June hike. The central bank’s chief economist’s speech two weeks later kind of rubberstamped the idea. Philip Lane’s slide pack showed how the oil futures curve was and still is clearly closer to the adverse scenario, which required a “limited monetary response”. Sources told news agency Reuters that such move in June was nearly a done deal. Even if a peace deal was reached before the meeting, the ECB would probably act to preserve credibility after signaling the move in April, they said, adding that there would be no assurances that any deal would hold and that energy prices would remain high for some time. Money markets assume 2-3 rate hikes by the end of the year. Front-end yields add 4.5 bps today with the long end more or less flat. US yield changes vary between 2 and 5.1 bps in a bear flattening move. The euro is facing some selling pressure, driving back below EUR/USD 1.16 in a mild risk-off climate and rising oil prices which offset about half of yesterday’s intraday drop ($108.5). Stocks lose around 0.5% in Europe and the US. The US PMI was close to expectations with services stabilizing at 50.9 and manufacturing improving to 55.3 on precautionary buying. The composite gauge matched April’s 51.7, pointing at a meagre 1% annualized growth in Q2. The survey price gauges indicate that inflation looks set to rise further just as the economy cools, the survey noted, as a surge in firm costs resulted in sharply higher selling prices. Front-end yields hold on to earlier gains after the report.

News & Views

In the Norges Bank’s (NB) Q2 survey, households expect inflation to be 4.4% 12 months ahead (up 0.3% from Q1). Prices are expected to rise 4.7% over the next 2-3 years (+0.2 ppts from Q1). Annual inflation in 5 years is seen at 5.1% (up 0.3%). Price expectations among economists and social partners (3.3% 1-y) were more modest. Business leaders raised theirs for the next year to 4.1%. 46.7% expect purchase prices to increase more over the next 12 months compared to the previous year (+17.6% from Q1). 33.1% expect the company’s selling prices to increase more than previous year (+8%). Annual 2026 wage growth among social partners is seen at 4.5%, up 0.4 ppts. The NB at the May meeting already raised the policy rate by 25 bps to 4.25% amid too high and above-target inflation for several years. The survey doesn’t provide much reason for NB to change the indication that the policy rate still might be raised somewhat further by year end. Money markets see (more than) one additional 25 bps hike by September. At EUR/NOK 10.71, the krone holds at the strongest levels against the euro since early 2023.

UK private sector output fell for the first time since April 2025 with the UK composite PMI dropping from 52.6 to 48.5. The decline was due to a sharp downturn in the services economy (47.9, a 64 month low). Aside from the pandemic, it was the lowest level for nearly a decade. Manufacturing output still improved (52.4 from 51.8). The decline in the services sector was seen as being due to economic hesitancy and weaker investment sentiment, alongside delayed spending decisions in response to the Middle East war. Some respondents also cited political uncertainty weighing on confidence. Manufacturing still was supported by frontloading ahead of expected price rises and supply issues. Private payroll numbers fell for the twentieth successive month. Input inflation eased slightly since April, but remained well above its long-run average. Alongside higher energy and raw materials prices, wage pressures also added to costs. Prices charged by UK private sector firms continued to rise sharply, especially in manufacturing (factory gate prices rising at fastest pace since July 2022). Survey owner S&P indicates that the May PMI suggest a 0.2% quarterly contraction.