Sunset Market Commentary

Markets

US & UK markets desynchronized with (most) European markets today. After a holiday yesterday, the first two adapted to (presumed) positive headline news on a deal in the US-Iran conflict. EMU markets already are in the correction/reversal phase on yesterday’s hope-driven risk-repositing as hostilities in the Strait of Hormuz illustrate the fragility of the process. Whatever the outcome, the ECB clearly entered the finetuning phase ahead of the June 11 meeting. In the current environment, a central bank stays cautious on any guidance. Even so, the direction of thinking is clear. ECB Schabel in a Reuters interview said that the central bank needs to raise interest rates at the June meeting, even in in case a peace deal might be reached. “Given the size and the persistence of the current shock, looking through is no longer an option”. According to Schnabel the inflation dynamics already moved beyond the adverse scenario, which assumed a rapid normalization of the oil price. There are also ever growing signs of price increases spilling to other parts of the consumer basket. ECB Chief economist Lane was less outspoken in an interview with Nikkei. Even so, Lane also indicated that the central bank likely will make a further upward adjustment to the inflation forecast. Even as he didn’t formally say what scenario the ECB currently has to cope with, he “admitted” that oil prices are likely to remain elevated for longer than anticipated in the March scenario. He also sees indirect effects beyond energy prices. After easing by up to 10 bps yesterday, German yields today rebound between 5 bps (5-y) and 1.5 bps (30-y). Philip Lane indicated that this is not a context to give guidance on what has to happen beyond June. Markets currently discount 90% of a 25 bps June rate hike. A next step is almost fully discounted by September (80%). US yields are catching up with the decline in Europe yesterday, easing between 7 bps (2-y) and 5 bps (30-y). After yesterday’s setback, Brent oil also rebounds ($100/b) as markets try to assess the status of the progress in the negotiations between the US and Iran. In a similar divergence US equites still open with gains between 0.3% (Dow) and 0.8% (Nasdaq). The EuroStoxx 50 corrects 0.6% after yesterday’s gain of about 2%. The dollar rebounds modestly (DXY 99.1, EUR/USD 1.163) but moves mostly remain technically irrelevant.

News & Views

The Confederation of British Industry (CBI) latest quarterly Distributive Trades Survey showed retail price growth cooling in May amid weak demand. Sales volumes in the retail sector fell short of seasonal norms in May, while annual sales volumes continued to fall but at a slightly slower pace. Next month, sales are expected to remain “poor” for the time of year, with the sales decline in annual volumes set to ease slightly further. Weak demand continues to weigh on retailers’ sentiment, which has remained negative since mid-2024, as firms anticipate that their business situation will deteriorate over the coming quarter. Against this backdrop, retailers expect to pare back both investment and hiring plans, extending a period of weakness that dates back to 2022. CBI nevertheless commented that despite the weakness in demand, there are already signs of renewed price pressures in wholesalers’ selling price inflation coming from the conflict in the Middle East.

The Hungarian central bank (MNB) left its policy rate unchanged (6.25%). The MPC assesses that the inflation outlook has improved significantly. Consumer prices rose by 2.1% Y/Y in April with core CPI running at 2.2%. Both figures were lower than projected in the March Inflation Report, placing inflation near the lower bound of the tolerance band. The stronger forint, as well as the postponed phaseout of regulated fuel prices and price margin caps moderate the rate of price increases. Corporate price expectations rose but still indicate subdued dynamics. Household inflation expectations declined further. All point to a more moderate inflation outlook despite upside risks from energy and commodity prices, opening the door to rate cut(s). The MNB for now sticks to the view that price stability can be achieved through tight monetary conditions. Going forward, it holds a data-dependent approach in which the persistence of the decrease in risk premia will also play a role. HUF swap rates today lose 11 to 14 bps across the curve. The forint is unfazed at EUR/HUF 355.