Fed starts QT and ECB slows QE

Market movers today

Today focus will be on a range of PMI data released throughout the day. Manufacturing PMIs will be released for Sweden and Norway in the morning, followed by the revised final figures for the Euro Area. In the afternoon, US ISM Manufacturing PMI is expected to decline following the weak Flash Markit reading last week. We will also get the US ADP private sector employment report for May, as well as the US Job Openings and Labor Turnover Survey (JOLTS) for April.

Bank of Canada will have a monetary policy meeting and we expect a 50bp hike, which is fully priced in by the markets. We will also have several central bank speakers on the wires, including ECB's Lagarde and Lane as well as Fed's Williams and Bullard.

Today, ECB will scale back its net APP purchases to EUR20bn for June, and Fed will commence its QT phase. ECB and the EU are set to publish assessments of Croatia's bid to join the euro next year.

The 60 second overview

Euro area inflation for May surprised on the upside, even of the revised expectations after the country releases on Monday. Euro area headline came in at 8.1% vs. 7.5% in April, while core printed at 3.8% from 3.5% prev. The seasonally adjusted monthly change was still around 0.5%, and no peak in sight, and given the recent dynamics we see core inflation peaking after summer. Yesterday's print naturally puts ECB under tough pressure, raising the market speculation of a 50bp rate hike coming in July. After the report, Kazimir said that he backed a 25bp hike in July but was open to discuss 50bp. The drivers of the euro area inflation came from energy as it rose 39.2% yoy while the food rose 7.5%.

Oil: Oil prices surged through the day to USD120bbl (WTI), until media reported that OPC members are looking into the possibility of exempting Russia's contribution, which all things equal opens the possibility for more oil to come to the market. Tomorrow, the OPEC countries will meet. Oil markets reacted strongly and dropped to USD115bbl.

Chinese Caixin Manufacturing PMI followed suit to the official PMI released a day earlier with a small uptick, but still remains in the sub-50 territory at 48.1

Biden and Powell met yesterday where Biden highlighted the objective to address inflation and ensuring its independence. Yellen also admitted that she underestimated the inflation risks and pressure already last year, but is aware of the repercussions now.

FI: The record European (core and headline) inflation print for May sent European rates on a bear steepening path as mounting pressure for ECB to hike 50bp in July increased. Bunds touched 1.12% which is the highest since 2014 (with the exception of a brief 2-day period in early May). Notably Italian spreads jumped on the inflation report, despite a solid Italian auction. US yields jumped 10bp, as a catch up to Monday's sell-off in EGBs.

FX: Persistently high oil prices could tempt some OPEC+ members to push for higher production. Our case for a temporary boost to NOK got more support yesterday with Norges Bank announcing a drop in the daily fiscal NOK sales. Risks are tilted towards further TRY weakness.

Credit: Yesterday, credit markets reversed to a risk-off tone after a few constructive sessions. The uncertainty was fuelled by accelerated and record-high Euro-zone inflation numbers in May that exceed the consensus estimate. ITraxx Main widened by 3.1bp to close at 87.5bp, while Xover widened 16.9bp to close at 437.4bp.