The war between Israel and Iran and the risk of further escalation weighed on markets this week. Equity markets largely traded in red and US treasury yields slid lower. That said, markets were by no means in full risk-off sentiment, with gold prices sliding gradually lower during the week and no noticeable outperformance of traditional FX safe havens. With oil prices up close to USD10 per barrel compared to levels before Israel’s attack on Iran, US recession risk lower and US equity outperformance, the USD has seen several tailwinds. Even so, it struggles to find persistent support and we see growing evidence that the de-dollarization narrative is gaining traction.
On the data front, the past week showed us that private spending on neither side of the trade war seems much affected through May. US retail sales did not show much sign of weakness, at least not in core spending, particularly not when you measure them against the dire consumer confidence. Chinese retail sales even surprised to the upside, lifted by stimulus. However, one key root cause for consumer concern, the weak housing market, softened further with continued low activity and declining prices. In Germany, the expectations component of the ZEW survey has now almost fully recovered from the ‘Liberation Day’ decline in April. Current conditions have also improved but remains low in a historical perspective.
We have seen a regular central bank flurry this week with several rate cuts including a major surprise from Norges Bank, see more in the scandi section. The Swiss National Bank (SNB) has now cut rates all the way to zero, as inflation remains muted not least on the back of a strong Swiss Franc. The SNB highlight that they will not take the decision to go negative lightly, though. Both the Bank of Japan and the Bank of England kept rates unchanged and saw fresh inflation data ticking in way too high this week. In Japan, inflation is mostly driven by food, and trade war uncertainties are pausing the hiking cycle. In the UK, inflation pressures are broader, but we expect they will find room to cut rates come August. The Fed kept monetary policy unchanged and did not provide markets with new guidance. The market reaction was very muted. We continue to see cuts in September and December, followed by three more in 2026.
Next week on the data front, we kick off with PMIs. We expect the euro area manufacturing PMI to stall just below 50 as tailwinds from front-loaded exports to the US fades. Weak consumer confidence should continue to weigh on the service sector which has lost steam in recent months. We will also keep a close eye on inflation data on Friday. At the NATO summit, the countries are likely to adopt the new 5% target for defence expenditure as a share of GDP (3.5% as actual defence spending and 1.5% as additional investments in resilience). In between, we will continuously monitor the situation in the Middle East and the risk that the US is pulled further into the conflict.
