In focus today
- Today brings the first euro area wage growth data for 2026, with the ECB’s negotiated wages indicator for Q1. We expect wage growth to remain at 2.9% y/y, broadly unchanged from Q4, in line with signals from the ECB’s wage tracker.
- In Germany, the Ifo indicator for May will be released. It shall be interesting to see if the indicator shows the same weaker picture from yesterday’s PMI survey.
- In Sweden, Riksbank vice governor Göran Hjelm speaks at 8.00 CET on monetary policy in an uncertain world. We expect him to repeat his message from the last meeting: the Riksbank should look through supply shocks, given well‑anchored inflation expectations, low inflation and weak demand. The latest ‘small’ Origo survey showed inflation expectations falling in May, with 2‑year expectations at 1.9% and 5‑year at 2.0%.
Economic and market news
What happened overnight
In the US-Iran war, reports that Iran’s Supreme Leader had ordered that near weapons‑grade uranium must remain in the country, directly clashing with a core US and Israeli demand that stocks must be shipped abroad. Reuters, citing sources, said Mojtaba Khamenei had ordered enriched uranium not to be moved, although Al Jazeera’s sources later denied this. The tougher nuclear stance initially drove oil up to USD107/bbl, but prices have since eased back to around USD104/bbl after more constructive comments from US Secretary of State Rubio, who noted “some good signs” in the talks. An Iranian source also told Reuters that “gaps have been narrowed”, leaving markets with mixed signals on the outlook for the conflict and energy prices.
In Japan, core inflation came in at 1.4% (cons: 1.7%) in April, easing more than expected to its lowest level since March 2022. Mainly driven by subsidies on fuel and education. Although inflationary pressures eased in April, it is likely that they will pick up again before long. While government measures are offsetting some of the price pressures form the energy shock, Bank of Japan policy makers are dropping hawkish comments signalling the chance of an interest rate hike in June.
What happened yesterday
In the euro area, activity softened further in May, with the composite PMI falling to 47.5, (cons: 48.8), signalling contraction. The setback was driven by services, which declined to 46.4, especially reflecting weakness in France. Manufacturing eased only slightly to 51.4, remaining in expansion, supported by firms working through pre-war order backlogs. Price pressures intensified as input costs rose sharply in both sectors, although output prices pointed to no imminent broad-based inflation surge. We still expect the ECB to deliver a 25bp hike in June, but weaker growth makes further tightening slightly less likely.
In the US, business activity stayed solid in May in contrast to the euro area, with the composite PMI unchanged at 51.7 and manufacturing surprising at 55.3. Services growth was steady at 50.9, but new orders and prices rose, while manufacturing input costs hit their highest since mid-2022. Other details were mixed, with flat output, slightly softer new orders and firmer employment. Overall, the report is marginally hawkish on inflation but unlikely to move markets and confirms stronger US resilience.
The European Commission’s new forecast points to weaker euro area growth and more persistent inflation. It now sees GDP rising just 0.9% in 2026 (from 1.2%) and HICP inflation at 3.0% in 2026 (from 1.9%), with inflation returning to 2% only in Q3 2027. The update is broadly in line with expectations and sits between the ECB’s March baseline and adverse scenarios, where ECB’s June projections are also likely to land.
In the UK, business activity weakened notably in May 2026 as political uncertainty and the war in the Middle East weighed heavily on the economy. The flash composite PMI fell to 48.5, a 13‑month low, with services sinking to 47.9, the weakest level since 2021, while manufacturing PMI held up better. Firms report falling output, rising inflation, supply shortages and job cuts, leaving the Bank of England torn between tackling inflation and avoiding a deeper downturn.
In Norway, Norges Bank’s Q2 Expectations Survey highlighted ongoing concerns about inflation expectations, which the bank has repeatedly stressed must be re‑anchored. CEOs’ 12‑month inflation expectations rose to 4.1% from 3.9%, and expectations among labour market organisations and economists also edged higher on 1‑ and 2‑year horizons. With no market‑based measures available, these survey results, particularly the CEO responses, are a key gauge for Norges Bank’s policy assessment.
Equities: Equities moved higher yesterday, with several markets either close to or at new all-time highs. It was a volatile session where macro was clearly the most important story, but Iran headlines created the largest intraday swings and at times overshadowed the underlying macro message. Globally, cyclicals outperformed, but beneath the surface the rotation was highly interesting across regions, sectors and industries.
In Europe, defensives led the market, and despite positive indices and higher rates, banks underperformed. That is a strong signal that the very stagflationary message coming out of the flash PMIs from Europe yesterday leads investors to worry that the ECB may be forced to hike rates for what equity investors would see as exactly the wrong reasons.
This morning, Asian markets are higher. Worth noting is that Japan, rather than the usual South Korea and Taiwan tech complex, is leading the gains. The reason is that gains are driven by a positive macro and reopening hope trade more than a classic tech rotation. We see the same dynamic in European and US futures, which are also pointing higher, led by Europe ahead of the US, and again not led by tech.
FI and FX: Another day of mixed reporting from the US-Iran negotiations kept EUR/USD close to the 1.16 level. While FI markets to a large degree continue to be headline-driven, euro area May PMIs also pushed ECB hike expectations lower, and we still to like our receiver bias in the short end of the EUR swap curve. This morning, we published an updated Yield Outlook. We expect long-end European swap rates to decline over the coming year but see the risk picture as more balanced and thus expect 10-year EUR swap rates to decline to a more limited extent. Our updated Fed call, which implies two rate hikes towards the end of the year, means that we are sharply revising up our expectations for US interest rates across horizons. In Scandi, we believe that long USD/SEK looks increasingly attractive.
, signalling contraction. The setback was driven by services, which declined to 46.4, especially reflecting weakness in France. Manufacturing eased only slightly to 51.4, remaining in expansion, supported by firms working through pre-war order backlogs. Price pressures intensified as input costs rose sharply in both sectors, although output prices pointed to no imminent broad-based inflation surge. We still expect the ECB to deliver a 25bp hike in June, but weaker growth makes further tightening slightly less likely.){kind=link}