Sunset Market Commentary

Markets

The euro zone’s four largest countries today released May inflation numbers. On a monthly basis, the pace slowed but most annual numbers rose further. French inflation increased by 0.1% M/M to 2.8% Y/Y (from 2.5%; highest since February 2024). Spanish inflation moved at the same monthly pace but hit 3.6% Y/Y (from 3.5%; second highest since May 2024). Italian prices rose by 0.4% M/M to 3.3% Y/Y (highest since September 2023). German inflation was exception to the rule with a 0.1% M/M-decline and a 2.7% Y/Y (from 2.9%) outcome. Overall, today’s numbers printed near consensus with our in-house KBC Nowcast model pointing to a 3.3% Y/Y reading (up from 3%) for the euro zone on Tuesday. That would be the highest reading since September 2023, moving further away from the ECB’s 2% inflation target. For goods, we expect Y/Y price growth to increase to 0.9%, driven by higher commodity prices. Despite a modest decline in price expectations (surveys), we expect services inflation to rise from 3% to 3.2%. Underlying core CPI is expected to pick up from 2.2% to 2.4%. Today’s numbers and more ECB comments further cement the case for a June 25 bps rate hike. Italian ECB Panetta, usually a dovish profile, said that the outlook seems to call for a rate recalibration to counter the risk of persistent inflationary tensions. More an more governors also point to depleted fuel stocks and rising price expectations as reasons to hike rates. The depleted stocks argument fits with the narrative that we’re just at the end of the beginning of the energy crisis, even if the US and Iran reach some kind of interim agreement. ECB Simkus is the first to look beyond the June meeting, at which he’ll likely support a rate hike. He argues that a second rate hike is more likely than not, but didn’t elaborate on the timing of such move (back-to-back or together with the September Monetary Policy Report?). EMU money markets currently prefer the second option. In our view, if the crisis persists, back-to-back seems to be the more likely and better path to follow.

Overall trading was muted today in anticipation of US President Trump’s (dis)approval of the interim deal. Brent crude hovers around $92/b. Daily changes on core bond yield curves are confined to 1 bp with UK gilts slightly outperforming after BoE governor Bailey said that the central bank can temporarily tolerate higher inflation. EUR/USD treads water near 1.1650. Stock markets have a guarded positive bias.

News & Views

The Swiss Kof economic barometer improved marginally in May from 97.8 to 98. After a sharp drop in March, the index already improved last month. Even so, the outlook for the Swiss economy remains muted as the index remains below its medium term average. Different bundles in the indicator showed mixed developments. On the production side, indicators for manufacturing are particularly under pressure but this is cushioned by a positive outlook in the indicators for financial and insurance services. On the demand side, the indicators for foreign demand are reported the show more favourable developments, but indicators on private consumption experience a setback. After strengthening to the EUR/CHF 0.90 area at the start of the conflict in the Middle East, the franc from mid-March weakened to settle in a relatively tight range roughly between EUR/CHF 0.90 and EUR/CHF 0.925 (currently 0.9125) as the Swiss National Bank warned that it has a greater willingness to intervene in the FX market as necessary to execute its inflation policy. The next SNB monetary policy decision will be released on June 18.

Swedish GDP decreased by 0.2% Q/Q (+2.0% Y.Y) in Q1. Inventories (0.8% positive contribution) and household consumption (+0.6% growth) were the main positives. Gross fixed capital formation dropped 2.3% Q/Q, driven by declines for investments in buildings and constructions. General government consumption decreased by 7.6%. Net exports also contributed negatively (-0.1%) as exports rose 2.2% while imports grew 2.5%. The head of the national accounts commented that the decline in Q1 followed large increases in central government expenditure in the preceding quarter (overall growth in Q4 2025 was 0.8% Q/Q). In a supply side approach, value added in the business sector decreased 0.2% as added value in goods-producing rose 1.1% , but with a 0.8% decrease in services producing industries. Government value added fell by 0.2%. Even as solid household consumption is a positive, today’s mixed growth report supports the Riksbanks’ assessment that “there is scope to wait until there is a clearer picture of the effects of the war and the supply shocks it entails (May policy decision)”.The Riksbank has its next policy meeting on June 17. Markets discount no rate move at that meeting. For August about 75% of a 25 bps rate hike is discounted. After a protracted decline in the February/early April period, the krone recently regained its composure with EUR/SEK since mid-May easing from 11.00 to currently trad near 10.78.