Markets
Weekend comments by ECB members added to the June rate hike case which is now almost fully discounted (95% probability) as negotiations on an interim deal between Iran and the US drag on. Bulgarian ECB Radev warned that the cost of acting too late can exceed the cost of acting somewhat earlier if there’s a risk that inflation expectations could become less anchored. German Board member Schnabel also elaborated on the risk of deanchoring inflation expectations which imply that the ECB can no longer look through the energy shock. Portuguese ECB Perreira is also in favour of acting sooner rather than later to avoid second-order effects later on. He wants to act quickly and decisively. The latter suggest that EMU money markets might currently be underestimating the possibility of back-to-back action by the ECB. The only attach a 25% change to two consecutive moves, with a second 25 bps rate hike only fully discounted by the October policy meeting. From a data point of view, the European central bank released its April Consumer Expectations Survey. The median rate of perceived inflation over the previous 12 months increased to 4% from 3.5%. Looking forward, median expectations for 1-yr, 3-yr and 5-yr ahead remain at elevated levels though close to/at March levels: 4% for 1-yr, 2.9% (from 3%) for 3-yr and 2.4% for 5-yr. The combination of these factors (add higher oil prices; see below) caused an underperformance of German Bunds today. The yield curve bear flattens with yields rising by 9.9 bps (2-yr) to 3.8 bps (30-yr). US and UK yield curves move in similar fashion but with gains of up to 6 bps at the front end of the curve.
Oil prices were already rising today over lack of weekend progress between the US and Iran. The move accelerated on reports that Iran will halt exchanges with the US in protest over Israel. Tasnim news agency referred to Israel expanding its ground assault in Lebanon. Apart from suspending talks and the exchange of documents through mediators, Iran and its “Axis of Resistance” are said to activate all fronts. This could imply trying to close down the Bab al Mandab Strait as well. That’s the chokepoint between Yemen and the Arabian Peninsula which connects the Red Sea to the Gulf of Aden (Indian Ocean). Since late 2023, Iranian-backed Houthi rebels have been causing havoc in the area with missile and drone attacks on commercial vessels. Brent crude jumped to $96/b compared with last week’s closing level around $91. Apart from adding selling pressure on core bonds, the move supports the dollar (EUR/USD 1.1625) while weighing on general risk sentiment. Key European benchmarks currently lose 0.5% to 1% with US indices erasing gains in futures trading to open 0.25% weaker.
News & Views
Swiss GDP adjusted for sporting events grew by 0.4% q/q following growth of 0.2% in the previous quarter, marking a downward revision from the preliminary 0.5% reading. Details now included revealed the industrial sector – manufacturing in particular – being the powerhouse, with value added growing strongly by 1.3% after several quarters of subdued performance. Services sector (0.2%) momentum remained subdued. Transport and financial services drove positive contributions but were offset by the decline in the retail sector, accommodation and food services. In the expenditure-based approach, domestic final demand developed weakly overall (0.1%). Government consumption grew at an above-average rate (0.9%) but equipment investment fell (-0.2%). Imports fell by 2.4%, reflecting the weak performance of domestic demand, the State Secretariat for Economic Affairs said. The Swiss franc loses some ground today but in trading unrelated to the GDP numbers. EUR/CHF tested the 0.91 support at the open in a guarded environment before bouncing off to trade around 0.914 currently.
The Czech manufacturing PMI eased slightly from April’s 52.9 to 52.2 in May, indicating growth at an above-series average. The headline number was supported by lengthening supplier delays to the joint-longest in four years, which would ordinarily be a sign of greater customer demand but in this case represent the Middle East driven disruption. That said, the upturn also stemmed from greater new (export) orders supporting output levels. Input buying rose with companies building safety stocks and trying to get ahead of future price hikes. Indeed, material shortages and higher energy & transportation costs were key drivers of cost inflation, making operating expenses rise at the second fastest pace since June 2022. With demand reported as being resilient, this translated into output inflation at its sharpest rate since October 2022. Even though Czech companies were more confident on output in the coming 12 months (above the series’ long-term trend), cost-cutting initiatives still led to a further decline in employment levels. The job shedding pace was the quickest since November 2025. EUR/CZK trades unfazed around 24.28.
 as negotiations on an interim deal between Iran and the US drag on. Bulgarian ECB Radev warned that the cost of acting too late can exceed the cost of acting somewhat earlier if there’s a risk that inflation expectations could become less anchored. German Board member Schnabel also elaborated on the risk of deanchoring inflation expectations which imply that the ECB can no longer look through the energy shock.){kind=link}