Iran Strikes Ship Near Hormuz, Reaction Muted

In focus today

• In Sweden, a couple of interesting data points are coming out today. First off, PPI gives interesting insights into the buildup on inflationary pressures and is often cited as an important leading indicator by the Riksbank. Even more interesting is the NIER survey containing, amongst many other things, price plans that will be scrutinized in order to assess the pass-through of current supply disruptions to inflation. Furthermore, the broader ETI is also one of the best indicators of Swedish GDP growth and has recently been indicative of growth within the 2-2.5% interval.
• In Norway, the retail sales for June will be released today. Higher inflation and the prospect of higher mortgage rates have dampened retail growth, and we expect a modest increase of 0.3% in May.
• The ECB’s Consumer Expectations Survey is released today covering May. Following a significant increase in March expectations stabilised in April with 1Y at 4.0% and 3Y at 2.9%. This is particularly interesting in relation to Schnabel’s recent hawkish comment about bringing the inflation back to target.

Economic and market news

What happened overnight

US-Iran agreement, a cargo ship was reportedly attacked near Oman by Iran, prompting the U.N. maritime efforts to pause its Strait of Hormuz (SoH) escort operation and raising doubts over a preliminary deal to end the US-Iran war. Iran’s Persian Gulf Strait Authority warned that ships outside its designated routes travel at their own risk, while shipping data showed crude flows through Hormuz have risen to their highest level since the war began. Despite an initial spike, Brent has slipped to below USD74/bbl and remains on track for steep weekly losses, as markets look past renewed Strait of Hormuz tensions and focus on the broader supply outlook.

What happened yesterday

In the US, the PCE inflation rose further in May, reinforcing expectations that the Federal Reserve could still deliver a rate hike later this year. Headline PCE inflation accelerated to 4.1% y/y in May, the first reading above 4.0% since April 2023, partly driven by higher energy prices amid the disruption in the SoH. Core PCE increased 3.4% y/y and 0.3% m/m, underscoring still-elevated underlying price pressures, especially in services. Nevertheless, the market has scaled back a bit on US rate expectations after PCE inflation was lower than expected in May.

In commodities, according to Reuters, Iraq is considering leaving OPEC if it does not secure a higher quota, following the UAE’s exit on 1 May, which has strengthened Iraq’s bargaining position. If traffic through the SoH normalises, increased output from the UAE and possibly Iraq could trigger a positive oil supply shock and even a price war that would effectively end OPEC, although Bloomberg tracking shows Hormuz traffic remains well below pre-war levels despite a recent pickup.

Equities:

Equity markets moved higher yesterday, but once again the dominant theme was not the index level itself but the significant sector and regional rotation underneath.

While European and Asian equities advanced, US equities moved lower, with trading once again dominated by intraday volatility centred on technology and the Iran/oil narrative.

As oil prices reversed higher during the US session, markets effectively unwound Wednesday’s rotation, with capital moving out of consumer sectors.

Micron’s exceptionally strong earnings released Wednesday evening also failed to provide lasting support for technology, as investor discussions increasingly revolve around the sustainability of earnings growth and, in particular, today’s unusually elevated profit margins across parts of the semiconductor and memory complex.

It remains important to separate these rotation drivers from the underlying macro environment. The current volatility is being driven by geopolitics and ongoing questions surrounding parts of the technology sector, while the macro backdrop remains exceptionally strong.

That continues to argue for subdued overall market volatility and an upward direction for equities over time.

This morning Asian markets are trading sharply lower, led by the more technology intensive markets, while both US and European futures are also lower with technology once again accounting for most of the weakness.

FI and FX: Moves were more muted in rate space during yesterday’s session. EUR swap rates tracked lower with the 2Y swap yield declining from 2.75% to just below 2.73% while the 10Y yield decreased marginally to below 2.92%. In the US, US yields dropped, in particularly in the front mirroring the moves in Europe. EUR/USD took a breather from its recent rally lower and ended the session back above 1.1350. EUR/NOK continued its rise, breaking above 11.20 as oil prices continue to trade heavy.