Markets
Who else than Donald J. Trump to give stock markets a boost going into the weekend and ahead of the SpaceX IPO, the world’s largest ever. Sentiment improved rapidly and dramatically after the US president yesterday backtracked on his threat to hit Iran heavily and take its Kharg energy island and instead announced the end of the war with a deal that’s soon to be signed. The timespan between both announcements was mere hours. Wall Street rallied up to 2.5%. European stock markets missed out on the rally but are catching up today with a 1.5% gain. Turning back to the potential interim peace agreement, it does look like Trump’s optimism this time around is shared by Iranian officials as well, with one senior official indicating to Bloomberg that it could be signed as soon as Sunday on the sidelines of a G7 summit taking place in Geneva on June 15-17. The provisions are reported to include, amongst others, an extension of the ceasefire by 60 days, the reopening of the Strait of Hormuz within a month of the signing, the unfreezing of blocked Iranian funds, a recommitment from Iran not to have nuclear weapons, the end of the US blockade and withdrawal of troops. Official Iranian communication remains more cautious though, with local state media issuing the usual pushback. Brent oil prices in any case tumbled yesterday and today with one barrel now trading at $87.7. The oil drop drags core bond yields lower as well. The European front end of the curve at some point tanked 10 bps before cutting losses in half. That may suggest some doubts continue to linger. Longer-term yields hold up better, with net daily changes varying between -0.1 and -2.5 bps in the German 10-30 year bucket. US rates priced in the news already yesterday. They trade higher again today (1-3 bps). The US dollar maintains the upper hand in currency markets in what appears to be driven by US Treasury underperformance since risk sentiment is solid and oil prices have dropped. That said, EUR/USD is only returning about half of yesterday’s appreciation to trade around 1.156 currently. DXY marches north to 99.8. USD/JPY moves beyond the 160 psychological threshold that may or may not prompt renewed interventions by Japanese policymakers.
The ECB was the first G7 central bank to respond to the inflation surge earlier this week. Next week gives the stage to the likes of the Bank of England and the Fed. The former will keep rates steady, banking on what is still a restrictive policy rate to do the work. Markets are bracing for a more hawkish Fed that is all but certain to keep rates steady but drop its dovish bias. Attention will be focused on the Q&A, which is going to be the first one under the new chair, Warsh. The BoJ is readying a hike (to 1%), with the Czech central bank most likely doing the same. Norway, Sweden, Australia and Switzerland are all expected to hold steady.
News & Views
In an interview with Bloomberg, Czech central Bank (CNB) governor Michl said that ‘the case for a rate hike has strengthened’ and that a June move now has become a real possibility. The comments from the CNB governor came even as headline inflation in the country in May slowed to 2.1%. Core inflation, however, still printed at 2.9%. Amongst other factors, the CNB governor indicated that a ‘real problem is that there is too much money in the economy’ created by years of zero rates and real negative rates before Covid. This was also supported by fiscal deficits. Michl points to this combination still pushing core inflation higher. On a potential rate hike, Michl indicated that this “would be a policy adjustment – something like calibrating the degree of monetary policy restriction.” KBC already updated its outlook for CNB policy. It envisages a signalling rate hike at next week’s meeting, followed by one additional increase at a subsequent meeting later this year, most likely during the August-November window. The Czech koruna continues to trade strong near EUR/CZK 24.17, maintaining recent gains, with the EUR/CZK 24.10/24.00 area marking an important technical reference (lows touched at the end of last year and early this year).
The National Bank of Belgium today published an update of its forecast for the Belgian economy. The shock of the war in Iran causes headline inflation to average 3.4% in 2026, mainly due to rising oil prices. It should gradually ease back to 2% in 2028. GDP growth is expected to fall temporarily to 0.6% in 2026, down from 1% last year, but should pick up to 1.3% in 2028. According to the projections, the budget deficit will widen further by 2028 due to rising interest expense. The impact of extensive fiscal consolidation measures will largely be offset by growing ageing-related costs and defence expenditure, as well as declining revenues. The NBB now expects the budget deficit to widen from 5.2% of GDP in 2025 to 5.7% of GDP by 2028, pushing up the debt ratio to close to 115% in 2028. In this respect, the Belgian newspaper De Tijd quotes NBB governor Wunsch as saying that the Belgian government needs to look for savings and/or higher revenues of an amount of €14 billion to limit the deficit.
