Sunrise Market Commentary

Markets

Market focus at least temporary moved from the Middle East conflict to US data yesterday and May CPI inflation in particular. After last week’s strong activity data (ISM’s, Jolts, ADP, Payrolls), rising inflationary pressures should get ever more weight in Fed deliberations. However, the May CPI report was almost bang in line with expectations. Headline inflation rose 0.5% M/M and 4.2% Y/Y (from 3.8%). Core inflation rose a milder 0.2% M/M to be up 2.9% Y/Y (from 2.8%). Energy prices understandably were an important driver (3.9% M/M and 23.5% Y/Y). Services inflation also still rose 0.3% M/M and 3.5% Y/Y. US yields spiked lower as the report at least didn’t bring the upward surprise some feared for. However, the easing was modest and temporary. Yields soon rebounded on growing signs of frustration from the US/president Trump. Iran not signing a ‘deal’ anytime soon would lead to additional military action he said. He later walked the talk. Higher risk premia overall finally propelled oil back from intraday lows near $91/b (Brent) to close near $95. This also filtered through into bond markets. US yields reversed the post CPI correction to close 2.5-3.5 bps higher. German yields added between 5 bps (2-y ) and 1.5 bps (30-y) as markets look forward to any ECB guidance on the central bank’s reaction function going forward. In the meantime, especially US equity markets for now are captured in a tentative sell-on-up-ticks pattern with the three main indices ceding between 1.6% and 2%. On FX markets , the dollar is holding near recent highs but at the same time isn’t able to decisively reap the fruits of its presumed safe haven status. DXY is blocked near the 100 barrier (close 99.95). EUR/USD (close 1.1535) stays away from the 1.15 correction low earlier this week. USD/JPY holds north of 160. BoJ governor Ueda not participating at next week BoJ decision adds to yen uncertainty.

Reported mutual strikes between Iran and the US overnight are causing a nervous start in Asia, but equity losses could have been bigger given the US sell-off yesterday. Later today, US PPI might give some insight in upcoming US price dynamics . However, the ECB policy decision including new forecasts is the main dish today. The ECB is expected to raise its policy rate by 25 bps to 2.25%. Key question is what conclusions they draw from updated forecasts on (the timing of) further hikes. Any guidance will be conditional and data/event dependent. Still, markets will try to find out how much policy needs to be tightened away from neutral and how fast the ECB will need to act to preserve its inflation credibility. With a next step in July only less than 50% discounted (September fully priced), maybe there is room for markets to position for frontloading if the ECB talks strongly on avoiding second round effects. Even if the ECB holds such a decisive bias it probably won’t help the euro much. EUR/USD (and the dollar in general) is still mainly driven by the global, geopolitically-dominated narrative.

News & Views

The Bank of Canada (BoC) yesterday kept the policy rate unchanged at 2.25%. BoC remains torn between weak growth but rising inflation. Canada’s economy shrank by 0.1% in Q1, weaker than expected at the time of the April projections. The BoC foresees growth to resume this quarter but not to the extent that it will pull the economy out of excess supply. Inflation meanwhile accelerated to 2.8% on energy prices (and base effects). There was only limited evidence of broad-based pass-through to other consumer prices, it said, as measures of core inflation have moved down to around 2%. Total inflation is expected to hover around the top of the 1-3% target band the near term before easing gradually towards 2%. Governor Macklem reiterated the two-sided risks: the BoC may need to cut if US tariffs escalate or deliver hikes if energy-driven inflation broadens into persistent price pressures beyond headline inflation. Both Canadian swap yields and the dollar ended the day little changed USD/CAD finished around 1.394.

The UK’s RICS residential survey for May contained signs of a subdued but stabilizing housing market. It said new buyer enquiries recorded a net balance of -34%, showing that agents reporting a fall outnumbered those seeing an increase. It is, however, the first time since January that this headline demand indicator hadn’t moved further into negative territory. A similar conclusion applies for agreed sales, matching the -37% of April. House prices continued to edge lower at the headline level, with the net balance holding at -35%, the survey noted. Short-term sentiment stays cautious with near-term sales expectations improving slightly to -25%. Over a 12-month horizon, expectations moved into neutral territory at +2%. Price expectations remain weak near term. A net balance of -45% is expecting prices to fall over the next three months. The year-ahead indicator, however, edged into positive territory (+6%).