Last week’s optimism on a reopening of the Strait of Hormuz faded this week as both US and Iran officials toned down the prospect of agreement and military action flared up again, including in Lebanon. The oil price is back above USD 97 for Brent. In our new economic forecasts published this week, we have assumed a very gradual normalisation of oil prices over several years in line with market pricing, which implies that there is some progress in getting shipments through the Strait but not a real solution soon. Clearly, there are risks in both directions from this.
Economic data from the US has been to the positive side this week, with the ISM survey pointing to increasing manufacturing production and employment, job openings higher than expected and the unofficial ADP employment report showing 122,000 private sector jobs added in May. However, the most important data point will be the Friday job report. The US economy continues to be boosted by tech-related investments which is also reflected in the stock market, where the strong performance of tech stocks continues. The US Treasury announced the result of their so-called Section 301 investigation of 60 economies regarding forced labour, which paves the way for replacing the current 10% tariffs when they expire on 24 July. However, also these tariffs are likely be to challenged in the courts. Currently, there is close to zero net revenue from tariffs, as incomes are matched by refunds of tariffs that have previously been found to be illegal. Hence, US fiscal policy is more expansionary than intended, which is part of the reason we now expect the next move from the Fed to be a hike.
In the euro area, May inflation rose to 3.2% y/y as expected, but perhaps more worryingly for the ECB, services inflation rose to 3.5% from 3.0% y/y, a bigger rise than can be explained by technical factors such as the timing of Easter. The extremely weak May PMI numbers for the service sector were revised up significantly, but the aggregate number of 48.5 still point to contraction. The ECB has quite clearly signalled that it will hike rates by 25bp at its meeting next week, where it will also present updated economic projections. These will likely reflect the same dilemma as the May data, namely that the economy is weakening but inflation is rising, both related to higher oil prices than in the bank’s latest base case scenario from March. Hence, uncertainty remains as to whether and when there will be another rate hike, but we do not expect to get clear guidance from the ECB on that.
A string of other central banks will follow with rate announcements. In the Fed, Kevin Warsh will host his first press conference as chairman. He has expressed scepticism of guidance tools such as the so-called dot plot of FOCM member expectations which are due to be updated at this meeting. Expectations of an autumn rate hike are increasing, though.
We expect the Bank of Japan to hike its policy rate to 1%, the highest since 1995. Hawks on the policy board have become more outspoken recently, and real wage growth has finally turned positive.
Weekly Focus will not be published next week, so the next issue will be on 19 June.
