Markets
Chipmaker Broadcom’s after-market earnings results sapped sentiment to some extent. A weaker-than-expected sales outlook in particular caused some renewed AI valuation concerns. The sector has had a mindboggling rally so perhaps not much was needed for the market to take some chips off the table. European stock markets still eke out a 0.5% gain but diving into the sectors, semiconductors and AI-related sectors (tech hardware, storage) are clearly lagging. Nasdaq on Wall Street opens with losses of around 1% with Broadcom slipping 15%, be it from record highs. The jury’s out whether we’re witnessing the start of a larger and broader correction or not.
The US dollar loses ground with the risk mood outside AI holding on pretty decently for now. EUR/USD rebounded from a sub 1.16 reading yesterday to 1.164 currently, calling off the immediate threat for a downside technical break that may have paved the way for a return all the way to 1.1392. DXY eased from yesterday’s highest closing level since the April 8 ceasefire to 99.23. Even USD/JPY marched lower. The proximity of the 160 barrier is clearly helping. This psychologically important barrier has been a trigger for Japanese officials to intervene before. Markets are wary to push USD/JPY beyond that level, for now at least. The yen also drew some support from a Bloomberg citing “people familiar with the matter” that the Bank of Japan is mulling a June hike with another one possible later in 2026. Money markets currently assume “later” to be December. EUR/GBP recovers marginally for a second day with the pair currently at 0.865 in technically insignificant trading.
Another reason for USD weakness is oil. Brent is trending lower to $94.6 per barrel. This compares to yesterday’s $97.81 and follows a new US-brokered ceasefire between Lebanon and Israel. Americans hope it keeps the peace talks with Iran on track. The Middle East country insists that any deal must include Lebanon too, which is home to the Iran-backed Hezbollah. Ongoing missile fire is testament to the shaky nature of the truce though. Core bonds enjoy it anyway with yields in the US down between 3 and 5 bps in a bull steepening move. German rates ease 1.2-2.5 bps. A June rate hike remains fully priced in. Prior to the ECB’s quiet period, which has kicked in as of today, most officials struck a hawkish tone that steered markets into their current positioning.
News & Views
Swiss inflation stayed subdued in May, according to data published by the Statistical Office (FSO). Consumer prices rose 0.2% M/M and 0.6% Y/Y, slightly softer than expected (was 0.3% M/M and 0.6% Y/Y in April). Prices increases thus stay on the lower side of the SNB 0%-2% price stability target band. Core inflation also printed at a mild 0.1% M/M and 0.3% Y/Y (unchanged from April). FSO said the monthly rise was due to factors including rising housing rentals, higher prices in the hotel sector. Prices for vegetables, petrol, car rental and car sharing also increased. Prices for air transport and heating oil eased, amongst others. Yesterday, SNB President Schlegel indicated that medium term prices pressure essentially stay unchanged. SNB policy is still expansive. However, with current inflation data SNB probably has every room, more than other CB’s, to await the impact on growth and inflation from geopolitical tensions/the supply shock. As such, it can keep a close eye on the FX-component of policy. Looking at prices of imported goods (-0.1%M/ and 0.7% Y/Y), the franc still contributes to containing inflation. This also allows SNB to keep its ‘warning’ on increased willingness to intervene in FX markets if necessary. After strengthening to the EUR/CHF 0.91 area last week, the franc this week eased to currently trade near EUR/CHF 0.918.
Czech May CPI increased by 0.1% M/M and 2.1% Y/Y. The outcome was below expectations. Last month headline inflation was 0.5% M/M and 2.5% Y/Y. Core inflation (ex-energy and un processed food) slowed to 0.1% M/M and 2.3% Y/Y (from 2.9%) in April, with especially processed food prices easing. Energy prices declined 0.3% M/M (to +1.8% Y/Y from 1.5%). Services inflation printed at 0.4% M/M and 4.7% Y/Y (from 4.8%). Goods prices were unchanged on the month and 0.6% Y/Y (from 1.1%). Today’s data at first sight should give Czech National Bank some comfort. The CNB early May left is policy rate unchanged at 3.5%, saying policy needs to be kept relatively tight. At the same time, Q1 labour market data showed very strong nominal and real wage growth at 8.1% Y/Y and 6.4% Y/Y respectively. This is a source of concern for CNB. The 2-y swap yield today eases about 7 bps to 4.24% with money markets pushing back expectations for a hike in the near future. Markets still discount a policy rate near 4% toward the end of the year. The Czech koruna trades little changed in a daily perspective at EUR/CZK 24.20.
