Markets
A corresponding rise in the oil price, bond yields and the dollar & softer equities were testament to some investor enervation. For now, we don’t want to call it outright risk aversion yet. Further evidence of the stalemate in the negotiations to solve the US-Iran conflict was the most evident ‘usual suspect’. The concept ‘ceasefire’ these days is undergoing a genuine rebranding/redefining. While officially still in place, the US and Iran again reported several reciprocal (‘defensively inspired’) military actions in the Persian Gulf region. Any solution, including a reopening of the Strait of Hormuz for now remains a far fata morgana. This morning, (US) trade policy also returned to the forefront as a factor of global economic uncertainty. The Office of the US Trade Representative after an investigation into alleged use of forced labour in imported goods of 60 trading partners, proposed a 10% (or 12.5%) levy on imports from those countries to avoid an ‘uneven’ level playing field for US workers, providing a substitution for the reciprocal tariffs that were found unconstitutional. Last but not least, two private credit funds limiting withdrawals also didn’t help to support market confidence risk sentiment. The whole mixed resulted in the Brent oil price regaining some further ground to currently trade near $97.5 p/b. The EuroStoxx50 currently cedes 0.6%. US indices open mixed to marginally softer. On yield markets, a risk-off sentiment as it is often linked to inflationary risks (oil, maybe also tariffs) likewise tends to translate into higher rather than lower yields. EMU/German yields add 3-4 bps across the curve. Markets over the previous days already concluded that an ECB rate hike next week has become ‘unavoidable’. ECB board member Elderson at least supported the tightening case as he indicated that it is increasingly unlikely the ECB can look through Iran shock. A September hike is now also fully discounted. EU April producer prices accelerating to 4.9% Y/Y (cf infra) are pointing in the same direction. US yields in a congruent move add between 3.5 bps (30-y) and 4.5 bps (5-y). May ADP private job growth at 122k was solid (admittedly close to expectations). After finishing this report, the services ISM might further finetune the US growth/inflation picture.
The dollar today profited a bit more from the risk-off that often was the case recently. EUR/USD is testing the 1.16 barrier. DXY at 99.45 is nearing the short-term range top (99.54 May top ). Some interesting price swings also occurred USD/JPY as the pair continues testing the 160 barrier. The pair this morning briefly dipped to the 159.4 area as PM Takaichi in Parliament repeated the country intends to take appropriate steps on FX and that it might happen in an context of international cooperation, including with the US. However, the ‘yen rebound’ was very short-lived. Later, BOJ Governor Ueda in general terms supported the case to continue policy normalization as/if price risks outweigh a potential hit on the economy. Even so, the message that the BOJ will continue to assess ‘the pros and cons of a hike’ was too balanced to support any lasting yen gains. USD/JPY again trades only a whisker away from 160.
News & Views
The OECD updated its economic outlook. Soaring commodity prices pushed up inflation, putting pressure on real economies and economic growth. The global GDP forecast for this year faced a downward revision from 3.4% to 2.8%, while next year’s prognosis remained unchanged at 3.1%. Apart from the base – “time-limited disruption” – scenario, they also produced a “prolonged disruption” scenario which lasts well into 2027 and in which growth is projected at respectively 2.1% and 1.8% Both scenarios occur against a background of an otherwise solid underlying momentum in the global economy, with output boosted by strong AI-related investment, production and trade, lower tariff barriers and supportive financial and fiscal conditions. Global inflation is expected to peak at respectively 4.1% and 5.2% by the end of the year in the two scenarios compared with a pre-war projection of 2.9%. The OECD advises monetary policy to remain vigilant. Temporarily higher headline inflation can only be looked through provided longer-term inflation expectations remain well-anchored. Regarding fiscal policy, they suggest to keep energy relief support temporary and targeted.
Eurozone producer prices rose by 0.6% M/M in April with annual headline PPI surging from 2% to 4.9%, the fastest pace since March 2023. Core PPI (excluding energy) accelerated to 0.9% M/M and 2.3% Y/Y (highest since June 2023). Interestingly, only energy prices were lower on a monthly basis (-0.3% but +12.3% Y/Y) with especially intermediate good prices moving up (+1.8% M/M & 3.9% Y/Y).
