Markets
“At some point, we cannot let the market do all the lifting. We need to take a stance.” Belgian ECB governor Wunsch in an interview with the Financial Times joined Schnabel in clearly signalling a rate hike at the upcoming June 11 policy meeting. He said that any peace deal confirmed shortly before the meeting would make the hiking case only a bit less strong, not derail it, because it’s impossible to tell whether it will last or be credible enough. Such an agreement, by the way, seems unlikely in the short run with renewed skirmishes in the last couple of hours. Iran targeted multiple US sites in Kuwait and Bahrain in retaliation for American forces striking a tanker that was headed to Iranian ports. That in turn prompted a US response on Qeshm island, Iran’s oil nerve center. Brent oil prices’ recent recovery extends into a third day with one barrel currently trading for $97.5. Wunsch was already “slightly in favour of hiking” at the April meeting. His comments came after European inflation yesterday accelerated from 3% in April to 3.2%, the highest since September 2023. Underlying gauges including core CPI quickened to an above-consensus 2.5%. Services inflation rallied to 3.5% from 3%, the joint-highest in a year. Euro area money markets are now fully convinced of a rate increase to happen next week with a follow-up hike priced in for September. European yields yesterday finished up to 2.8 bps lower. They recovered a large part of the drop at the open which was triggered by US President Trump trying to downplay Iran’s suspension of the talks. US yields showed similar intraday movement, supported by a sharp jump in April job openings to a 2-year high. Net daily changes were <1.5 bps. EUR/USD closed at opening levels of 1.163, EUR/GBP fell for a second day towards 0.8638 – both in uninspired trading. USD/JPY meanwhile hit the 160 barrier in trading this morning. Japanese officials probably have their finger at the trigger. Renewed JPY weakness comes as the finance minister announced an extra budget to Middle East conflict impact.
Accompanying the overnight geopolitical news flow, are the new US trade tariffs that have been announced by the Office of the US Trade Representative (see below). They more or less match the 10% that is currently in place but which expires in July, meaning it may not change that much in practice. Private credit is also returning to the fore with two funds capping withdrawals in the last couple of hours. Overall market sentiment remains mildly positive still, with most Asian indices trading in the green. European exchanges are readying for a slightly lower open though. The economic calendar today features the US ADP job report and the May services ISM. Solid readings are likely to add further to already growing Fed rate hike bets and may keep US yields and the dollar upwardly oriented. The Fed releases its Beige Book as the kickstarter to its policy meeting cycle. A slew of ECB and Fed speeches are scheduled.
News & Views
Australian GDP growth slowed from a stellar 0.9% Q/Q-pace in the Dec 2025 quarter to 0.3% Q/Q in the March 2026 quarter (vs 0.4% consensus estimate). Y/Y-growth was unchanged at 2.5%. Modest household and public sector expenditure as well as cyclone disruptions to mining and export activities explain the growth slowdown. The demand-side breakdown showed household spending rising by 0.5% Q/Q. Rising interest rates and significantly higher fuel costs in the March month created an environment for more cautious consumer behavior. A halving of the fuel excise could provide some relief in the June quarter. Government consumption fell by 0.2% Q/Q, the lowest since Sept 2022. Private business investment rose by 6% with the largest rise in 30 years in machinery & equipment (+16.3%) on the back of an expansion of data centers. The contribution of investment to GDP growth was moderated though as most of this equipment was imported. Net exports was the biggest drag on growth, detracting 0.8% percentage points. Exports fell by 1.1% Q/Q, the largest quarterly decline in two years, as weather disruptions impacted key industries.
The office of the US trade representative released its findings in Section 301 investigations relating to failures to take action on trade in forced labor goods. The investigation is one of the side-tracks to replace tariffs previously shut down by the US Supreme Court and currently being replaced by a temporary levy. The USTR proposes action in 60 cases: 10% (the EU, Mexico, Canada, Ecuador, Indonesia and Pakistan) or 12.5% (other 54) depending on whether economies impose prohibitions on forced labor imports (or have committed doing so) or not. The levies are subject to a public comment and review period before implementation.
