Weekend Digest and a Quiet Start to the Week

In focus today

It will be a quiet start to the week on the data front. From Sweden, we get the Riksbank’s Business Survey. Overnight, the Reserve Bank of Australia (RBA) is widely expected to leave monetary policy unchanged. Markets price in the first rate cut only for May 2025.

French politics will continue to be in focus this week. On Tuesday 18 June at 10:00 CEST we will host a webinar on the French election and the impact on markets (in Danish).

On Thursday, Norges Bank, the BoE, and the SNB will announce their monetary policy decisions. We expect all three central banks to keep rates unchanged, at 4.50%, 5.25%, and 1.50%, respectively. On Friday, we watch for June PMIs from the euro area and the US.

Economic and market news

What happened over the weekend

In France, on Friday markets were left spooked by the prospects of an uncertain French election outcome. A poll showing support for both the left- and right-wing coalitions was interpreted as continued uncertainty about French public finances, since both sides have large unfunded spending plans. This sent yield spreads lower with the DE10Y-FR10Y down 10bps. Then, over the weekend cracks started to appear in the left wing “Popular Front” alliance as far-left party leader Mélenchon removed critics and opponents of the alliance from his party’s list of candidates. This resulted in members of other parties in the alliance questioning whether they could work with Mélenchon due to his “undemocratic” methods. However, on Sunday Mélenchon regained some of the coherence of the left-wing alliance by saying he would not insist on running as candidate for the prime minister of the alliance – which has previously been a key dividing factor in the alliance.

In geopolitics, the overall message from the G7 meeting in Italy, which ended Saturday, was a continued tough-on-Russia stance. Leaders agreed to a USD 50bn loan for Ukraine set to arrive towards the end of the year, while threatening further sanctions on Chinese entities that are supporting the war effort.

In China, the PBOC kept its one-year MLF loan rate unchanged at 2.50%, as widely expected. May industrial output came in slightly lower than expected at +6.0% y/y (cons.: 5.6%), while retail sales surprised to the upside at 3.7% y/y (cons.: 3.0%). The market reaction was mostly muted, though Chinese blue-ship stocks edged slightly higher.

What happened on Friday

Swedish inflation came in higher than expected as the CPI increased 0.2% m/m (cons.: -0.1%) in May. The main contributors were volatile food and flight prices, while service inflation had a setback. Overall, we see the factors contributing to this month’s increase as temporary and maintain our Riksbank call with the next cut in September, followed by a 25bp cut every quarter bringing the policy rate to 2.25% at the end of 2025.

US consumers were much gloomier than expected as the flash University of Michigan consumer sentiment survey printed at 65.6 (cons.: 72.0). The market reaction was muted, however.

Market movements

Equities: Global equities ended lower on Friday, capping off a week dominated by political chaos in France and a US disinflationary environment that bolstered faith in Federal Reserve cuts, despite a slightly hawkish Summary of Economic Projections (SEP). Given the US’s dominating size, equities still finished higher last week, driven by cyclical outperformance. In essence, US tech was the only game in town, while Europe and financial sectors significantly underperformed. Last week alone, tech outshone financials by a remarkable 8%. In the US on Friday, the Dow was down by 0.2%, S&P 500 decreased by 0.04%, Nasdaq increased by 0.1%, and Russell 2000 fell by 1.6%. Asian markets are trending lower this morning together with US futures. European futures are on the rise.

FI: It has been a very volatile week after the EU parliamentary elections and President Macron calling for a snap election for the French parliament after his party suffered a significant election loss and the nationalist party lead by Marine Le Pen won the EU parliamentary election. The 10Y spread between France and Germany widened almost 30bp during last week to reaching 80bp. This is similar to the level we saw ahead of the presidential election in 2016-2017, when Marine Le Pen argued for a”“Frexi””. However, Le Pen stated during the weekend that she does not want to create a chaotic situation and the risk of Frexit seems very limited.

FX: EUR crosses remained heavy under pressure during Friday’s session driven by uncertainty in European politics, most notably against the CHF and the USD. The news that the left-wing parties have formed an alliance to challenge Macron is likely the reason for the growing anxiety in the market about political uncertainty. USD/JPY edged slightly higher following the BoJ’s decision to reduce bond purchases, which was interpreted as dovish. Later this week we look forward to the Norges Bank, Swiss National Bank and Bank of England meeting on Thursday.