Markets
Iran yesterday suspended talks with the US over the ongoing war between Israel and the Lebanon-based Hezbollah. It threatened to attack Israel in response and warned for the “axis of resistance” to become active on all fronts. That would include a full closure of the Hormuz Strait as well as the Bab-el-Mandab Strait, another critical waterway that could disrupt flows from the Red Sea to the Mediterranean via the Suez Channel and to the Indian Ocean via the Gulf of Aden. Oil prices shot up to nearly $98/b compared to the $92 close on Friday. Brent then eased from the highs to currently trade around $94 after president Trump said Israeli president Netanyahu agreed not to strike Lebanon’s capital Beirut in return for Hezbollah to stop its own attacks on northern Israel. The situation remains very much in flux with different interpretations complicating the matter. Netanyahu for his part said the campaign in southern Lebanon would simply continue, probably not to Iran’s liking. Anyway, Trump’s intervention caused the oil turnaround and with it US Treasuries, which saw yields spike to around 7 bps at some point. The curve eventually finished up to 3.1 bps higher in a bear flattening move. European yields missed out on most of the screeching U-turn with net changes still amounting to 10 bps at the front. Bund futures suggest a further decline at the open. Stock markets showed similar swings. EUR/USD dropped from as high as 1.166 to a 1.1608 low and in the end settled around 1.163. DXY closed above the 99 barrier while USD/JPY nudged higher towards the 160 barrier. That level has triggered FX interventions in the past. EUR/GBP slid to 0.8644 with the YtD low (0.8609) steadily approaching.
Economic data yesterday included the ECB’s inflation survey which showed consumer expectations at elevated levels at all horizons. Together with the European inflation figures on tap today (expected at 3.2% headline and 2.4% core vs the KBC nowcast of 3.3% and 2.4%) it keeps the pressure on the ECB going into next week’s policy meeting. More policymakers meanwhile are hinting at action with Schnabel doubling down on her message of last week that the central bank can no longer look through the energy shock. The US manufacturing ISM was strong, rising from 52.7 to a better-than-expected 54 in May. Rising output levels (54.3), new orders (56.8), elevated supplier deliveries (partially due to the Middle East disruption, though) and less drag from the employment component supported the headline index. The US eco calendar today centers around the JOLTS job openings report as the amuse-bouche to the more important labour market gauge, the US payrolls on Friday. Trading is likely to be dominated by the ongoing geopolitical sage though.
News & Views
Bloomberg reports that the European Commission is weighing plans to grant member states additional fiscal flexibility to cope with the impact of higher energy costs due to the Iran war. People familiar with the discussions say that they want to smart copy the current escape clause for the defense carve-out. Governments would be able to spend around 0.3% of GDP on energy-related spending outside of the EU’s fiscal framework.
The pace of South Korean inflation held steady in May at 0.5% M/M whereas consensus expected a slowdown to 0.2%. Annual inflation picked up further and more than forecast, from 2.6% to 3.1%, and matching the fastest pace since December 2023. Underlying core inflation picked up as well, from 2.2% to 2.5% which was also the strongest price pressure since end 2023. Price pressure was broad-based with inflation in industrial goods excluding oil products accelerating to 1.6% from 1.4%. Personal services inflation rose from 3.2% to 3.7%. Today’s hot inflation prints come after the Bank of Korea took a hawkish turn last week under its new governor Shin Hyun Song. Two MPC members (out of seven) already preferred a rate hike following upward revisions to growth and inflation numbers. Apart from the energy shock, the domestic economy is firing at all cylinders thanks to a booming semiconductor sector. With inflation drifting away from the 2% target, it’s clear that rate hikes are coming soon. The Korean won is still trading historically weak above USD/KRW 1500.
