Markets
The ECB as expected raised its policy rate by 25 bps to 2.25%. After already pondering the impact of the war in the Middle East in April, new projections indicate that the conflict is generating inflationary pressures throughout the economy. The baseline inflation projection was upwardly revised and is now set to average 3%, 2.3% and 2% over 2026-28. Core inflation is seen at 2.5% in 2026 & 2027 and at 2.2% in 2028. Growth was downwardly revised be it only modestly to 0.8%, 1.2% and 1.5% over the 2026-2028 period. The ECB indicated that yesterday’s rate hike in no way should be considered as an insurance/precautionary step. It was needed across all scenarios the ECB was contemplating. The fact that growth is holding up relatively well apparently also was a factor for the ECB to currently give more weight to focusing on its mandate of price stability. The ECB maintains a data-driven, meeting by meeting approach. Even so, an upward revision of almost all cost and price indicators suggested that a back-to-back rate hike at the July meeting remains an option if higher oil prices continue to have a further direct and indirect impact on inflation. The ECB decision as such only had limited impact on trading. Money markets still see about 60% of a next hike already at the July meeting. German yields eased about 4 bps across the curve, but this was mainly due to gyrations on broader markets. These broader markets yesterday were haunted by some TACO-like communication from US President Trump. The US President early in US dealings indicated that the US prepared to hit Iran vary hard and intended to take Iran’s Kharg energy island. However, hours later the message was completely different again. The president called off the attacks as a deal was very close. For now, there is no confirmation from the Iranian side. Even so, markets still were prepared to buy the new ‘good news’. US yields declined between 7.4 bps (30-y) and 9.5 bps (5-y). US equities, which more or less ‘ignored’ the initial war rhetoric, finally closed the session with gains up to 2.54% (Nasdaq). Moves in FX again were more modest. The DXY USD closed at 99.85. EUR/USD rebounded to 1.1578. Even the yen gained some ground (USD/JPY close near 160).
This morning, Asian markets are joining yesterday’s risk-rally from the US. However, as long as the ultimate confirmation on a deal hasn’t been delivered, headline risk still has its role to play. Brent oil dropped below the $90 p/b handle (currently $88.35). US yields stabilize after yesterday’s setback. The dollar this morning is holding up fairly well (DXY 99.85, EUR/USD 1.1565, USD/JPY even rebounds back north of 160). Aside from the headlines on the US-Iran conflict, the US calendar contains the U. Michigan consumer confidence, including inflation expectations’ measures.
News & Views
The Turkish central bank yesterday kept its main policy rate unchanged at 37%. The MPC also maintained the overnight lending rate at 40%. Inflation in May accelerated to 1.71% M/M and 32.6% Y/Y to be compared with yearly price growth at 30.87% Y/Y in March. In May CBRT also upwardly revised is forecast for in year-end inflation to 26% this year and 15% next year. In its Q1 inflation report the bank expected inflation with a 70% probability, to be between 15% and 21% end-2026 and between 6% and 12% at end-2027. Despite higher actual inflation and an upward revision to the forecast, the CBRT saw the underlying trend of inflation, which increased in April due in part to higher energy prices, decreasing slightly in May. It said activity in Q1 has slowed and leading indicators suggest continued weak demand. A tight monetary policy stance needs nevertheless to be maintained until price stability is achieved. In case of a significant and persistent deterioration in the inflation outlook, the policy stance will be tightened, the statement warns. The Turkish Lira kept steady initially but lost ground again in the final trading hours yesterday. USD/TRY hit a new high around 46.2, EUR/TRY closed at near-record levels of 53.55.
Sources told news agency Bloomberg that India is preparing for a wider budget deficit FY 2027. The 4.3% target set in February could climb as much as 0.5 ppt to 4.8%, surpassing the 4.4% of last FY 2026. The Finance Ministry had stressed recently that any potential worsening in public finances wouldn’t be due to lack of fiscal discipline but instead is the result of higher energy prices dampening economic growth and weighing on the currency. India imports more than 80% of its oil and rising fertilizer prices have increased (doubled) the cost of related government subsidies. India missed its budget goals the last time during the pandemic, when the deficit more than doubled to 9.2% of GDP. That had since then prompted the Indian government into fiscal conservatism.
