In focus today
In the US, ISM Manufacturing index will be released for May. Regional Fed indices are pointing towards another uptick despite the energy supply uncertainty.
In the euro area, we receive data on unemployment in April. We expect 6.2%, in line with consensus. While unemployment is low, the labour market has softened, with slower employment growth and weaker expectations from firms after the war in Iran. We also get the final manufacturing PMI for May, which we expect to confirm the flash estimate at 51.4.
For the remainder of the week, focus turns to euro area flash HICP on Tuesday. In the US, labour market data is due throughout the week, culminating in the jobs report on Friday. Closer to home, attention turns FX reserve data in Denmark due Tuesday, the Danske Bank Nordic Outlook on Wednesday and Sweden’s CPI on Thursday. All this unfolds against the backdrop of developments in the Middle East, which continue to be a key market driver.
Economic and market news
What happened overnight
China released PMIs from both the official NBS and the private RatingDog on Sunday and overnight, respectively. RatingDog manufacturing eased from 52.2 to 51.8 (cons: 51.6), while NBS manufacturing declined from 50.3 to 50.0 (cons: 50.0). The NBS details point to softer demand, with new and export orders back below 50, while employment remains weak and input costs elevated despite some moderation. On the services side, the non‑manufacturing PMI moved back into expansion at 50.1, supported by holiday‑related spending and continued resilience in services and high‑tech sectors.
What happened over the weekend
In the euro area, May flash inflation data from Germany, France, Italy and Spain (around 75% of the aggregate print) showed headline inflation rising mainly on the back of energy. France, Italy and Spain came in close to expectations, while German regional CPI surprised on the downside. Overall, the data suggest that the ECB can take more time to assess the impact of the energy shock before acting. While a June hike is seeming like a done deal, a second hike already in July is becoming less likely.
In Sweden, significant revisions to national accounts data showed stronger historical growth but slightly weaker momentum at present. In Q1, GDP fell 0.2% q/q while rising 2.0% y/y, with the weakness reflecting mainly a larger decline in government consumption and investments after the strong uptick in Q4. Household consumption, the most important demand component right now, grew more than expected, rising 0.6% q/q. Overall, the release was more solid than headline figures suggest, and the need for further stimulus should be re-assessed on the back of these numbers. Given the Riksbank’s unusually large focus on resource utilisation and the slow recovery, the data should be seen as hawkish on the margin.
In Norway, the seasonally adjusted unemployment rate was unchanged at 2.1% in May, as expected, with the gross number of unemployed falling by 900. While this signals a tight labour market, the figure is marginally weaker than Norges Bank’s projection in the March MPR (2.0 %) but is unlikely to affect the monetary policy decision on 18 June. Retail sales came in higher than we expected at 0.3% m/m in April, taking the underlying trend to -0.8% 3m/3m (prior: 0%). With households facing headwinds from higher inflation and signals of higher mortgage rates, we expect consumption growth to be more muted going forward.
Fed speakers on Friday were broadly in line with the shift we outlined in last week’s Reading the Markets USD, 26 May, where we argued that the balance of risks has moved towards faster inflation and tighter monetary policy. Kashkari and Schmid leaned hawkish after the strong April PCE print and the latest energy shock, while Bowman (dove) noted that a prolonged Iran-related energy shock could change her rate outlook. Paulson and Daly both see policy as well positioned but note that a lasting conflict and higher oil prices are key upside risks to inflation that could increase the need for further tightening.
Equities: Global equities ended the week on a firmer footing rising 0.4% on Friday, supported by gains in IT and financials. S&P 500 advanced 0.2%, with tech leading the sector table, up 1.9%. This marked the ninth consecutive week of positive gains for the S&P 500. Nasdaq rose 0.2%, Russell2000 declined -0.6%. Overnight, Asian equities and US futures are in green.
FI and FX: It was a relatively quiet end to the week in FX markets. NZD was the big mover on Friday, while the rest of G10 was steady. EUR/USD ended the week around 1.1650 following the big drop in oil prices. US interest rates fell back last week with the 10Y Treasury yield falling to 4.43% down more than 20bp from the top in mid-May. The impact on EUR/USD FX swaps was limited as interest rates in the euro area also fell. Scandies were steady on Friday, with EUR/SEK trading around 10.77 and close to the low from April.
