Markets
President Trump retreated in the Situation Room last Friday to make a “final determination” on a preliminary agreement that would, amongst others, extend the April ceasefire but reportedly left the room without having made any decision. No one really knows what conclusions to draw but markets in any case aren’t too worried about it. US and German bonds finished the week higher with the latter slightly outperforming the former. Net daily changes stayed confined to less than 3 bps though. Oil prices eased to their lowest level since mid-April, supporting the small upleg in core bonds. US-Iran optimism held up the main US stock indices as well with minor gains between 0.2 and 0.7%. The US dollar trailed most of its biggest peers but trading was technically insignificant. EUR/USD flipped between gains and losses before eventually having closed slightly higher around 1.166. DXY mirrored those moves around the 99 barrier. Sterling steadied around EUR/GBP 0.8665.
The weekend saw some skirmishes in the Middle East again. The US struck some Iranian radar and drone sites on Qeshm island and in southern Iran. It branded the move as a defensive one, in response to Iran taking out a US drone earlier. Iran’s semi-official Fars news agency this morning said the country in retaliation targeted US air bases. This ongoing sparring creates some doubt over a potential deal and pushes up the price of oil marginally at today’s open. Brent is currently trading around $93/b. The market’s view, however, remains an agreement will be found either way. The US dollar holds a slight edge this morning and US Treasury yields eke out a couple of basis points, basically undoing the Friday declines.
This week’s economic calendar is usually an interesting one. A new month traditionally kicks off with an US economic update, starting with the US manufacturing ISM scheduled for release today. JOLTS job vacancies are on tap tomorrow, followed by the ADP job report and services ISM on Wednesday. Friday’s payrolls report are the typical cherry on the cake. We assume the data to combine a solid economy with a resilient labour market that will ultimately end up in a more neutral bias from the Fed in its June policy statement – the first one with chair Warsh at the helm. The European economic calendar features the ECB’s consumer inflation survey today. A further rise in expectations is the most likely outcome, adding further pressure, insofar still needed, on the central bank going into its meeting next week. Our in-house KBC Nowcast model points to a 3.3% Y/Y reading (up from 3%) for the euro zone HICP print 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%.
News & Views
Rating agency S&P affirmed the Hungarian BBB- rating while also keeping the negative outlook on the lowest possible investment grade rating. “The negative outlook reflects our view of risks to Hungary’s fiscal and economic stability over the next two years. Large budgetary deficits, high debt, and elevated interest expense continue to limit Hungarian authorities’ policy flexibility to manage endogenous and exogenous pressures”. Net general government debt is set to peak at 74% in 2027 before starting to decline. For 2026, the general government deficit is set to worsen to 6.75% of GDP due to pre-election spending, including untargeted subsidies and tax relief on household energy consumption. In 2027, the deficit is expected to remain elevated at 5.25% of GDP. A successful exit from the European Commission’s excessive deficit procedure (EDP) is contingent on the government’s ability to implement ongoing expenditure restraint and a credible multi-year framework. S&P believes that will only happen in 2030.
The FT reports that Bulgaria will be placed under the EC’s excessive deficit procedure only months after joining the Eurozone for breaching fiscal rules. More specifically for a budget deficit above the 3% of GDP threshold. The Bulgarian budget deficit widened to 3.5% of GDP last year and is seen increasing further this year (4.1%) and next (4.3%). Other countries in the EDP-procedure are Romania, Poland, Belgium, France, Hungary, Slovakia, Austria, Finland and Italy.
