Fed to pause, focus on July meeting

Market movers today

Even though core inflation remained relatively high at 0.4% m/m in May in the data released yesterday, markets now price only a 10% probability that today's rate decision in the US will be another hike - so if there is a hike, it will be a surprise. Attention will likely focus on the outlook for the July meeting, where the market is pricing a hike with 60% probability. A large minority of FOMC members have previously indicated that they expect a July hike, and there is a chance that this will now become a majority.

Euro area industrial production numbers for April should show a rebound after the large drop in March.

Inflation in Sweden should show a decline in May as there are indications of lower airline and food prices, among other things. We expect y/y CPIF inflation to decline from 7.6 in April to 6.3% in May, which would be 0.8 percentage points below the Riksbank's latest forecast - but unlikely to change the rate outlook, as it is still much too high inflation.

Overnight China releases its monthly batch of data among other things covering retail sales, industrial production and housing.

The 60 second overview

Market wrap: Global stocks climbed further yesterday while bond yields moved higher as markets scaled back Fed rate cut expectations in the second half of the year. Oil and metals prices recovered somewhat.

US CPI with soft details: US core CPI for May came out in line with expectations at 0.4% m/m. However, the details were to the soft side as the 'super core', CPI ex. shelter and health care, was up only 0.2% confirming the moderation that started in April. Used car prices pulled up the core index but this is likely to be temporary as wholesale prices have moved lower again in the past months and tend to lead retail prices. The headline inflation came out in line with expectations at 0.1% m/m pulled down by lower energy prices. The annual increase in core inflation is now 5.3%, the lowest rate in 1½ years and trending lower.

German ZEW bounces but is still weak: The ZEW expectations index increased in June from -10.7 to -8.5. It tends to give a good signal of PMI manufacturing so it suggests we may see a slight improvement in the June data after the declines in the past two months. The level of ZEW is still low, though, thus point to weak activity still.

Strong UK labour data: The UK employment report showed wage increases rising further to 6.5% y/y (consensus 6.1%) from 6.1% in April y/y and employment gains still being solid at 250k from Feb-Apr compared to the previous three months. ILO unemployment. The markets now price an additional 135bp of hikes from Bank of England to reach a policy rate of 5.75%. 

Equities: Global equities enjoyed yet another day of risk-on, with cyclical stocks leading the outperformance and utilities the only sector lower. Yields and equities were rising in tandem on a day with US CPI release. Go 12 months back and you will see the complete opposite outcome. The move away from inflation fear is continuing and one should expect the bond equity correlation to be negative going forward. In US, Dow +0.4%, S&P 500 +0.7%, Nasdaq +0.8%, and Russell 2000 +1.2%. Asian markets are mixed this morning while Japan continues to shine. European and US futures are surfing around the closing levels from yesterday.

FI: The low US headline CPI led initially to a sharp 10bp drop in front end US rates, which pulled the European peers lower as well. However, as markets digested the numbers, yields reversed and ended 12b higher in the US and 5bp in 2y Germany as Fed rate cut expectations in H2 were scaled back. The sell-off was led by the sub5y of the curve, in a flattening move. The strong UK labour market data sent UK yields markedly higher with limited spill-over to euro government yields.

FX:  Yesterday's session saw GBP, SEK and not least NOK trade strongly while the USD weakened slightly on the US CPI print. EUR/USD trades just below the 1.08 mark heading into the Fed and ECB meetings while EUR/SEK trades in the mid 11.50s ahead of Swedish CPI.

Credit: Rather quiet day in the credit market with iTraxx Main 1bp tighter to 77bp while iTraxx Xover tightened 4bp to 406bp

Nordic macro

May inflation data for Sweden is due today at CET 8:00. We anticipate CPIF to decrease to 6.3 % y/y and CPIF excl. Energy to 7.7 % y/y. This is 0.8 and 0.4 percentage points below the Riksbank's forecasts, respectively. These deviations are quite significant, but considering the overall level of inflation, they are unlikely to be enough for the Riksbank to feel comfortable enough to refrain from a 25bp hike at the upcoming June meeting.

Regarding the details, it is worth noting that we expect a decline in food prices as well as transportation services and recreational activities. There are two factors that add some uncertainty to the forecast. Firstly, we have assumed that one-third of the remaining rent increases took place in May. Secondly, the fact that Beyoncé held a concert in Stockholm could have temporarily increased certain subcomponents, which then should see a reversal in the June data.