Inflation and ECB in focus

Market movers today

The big event of the day is the ECB meeting. The ECB is expected to raise its growth projections by 0.3pp for this year and next year. We expect ECB's PEPP purchase guidance to shift from 'significantly' to 'moderately' higher than at the start of the year, i.e. we expect PEPP buying to be EUR70bn/ month in Q3 versus the current net purchase pace of EUR80bn/month.

The US CPI inflation for May is also a key release today; as in past months, due to base effects, the focus is on % m/m price changes, where consensus is expecting some moderation in both headline and core inflation (to 0.5%) compared with April (about 0.8%).

In Scandinavia, all three countries release monthly inflation prints. See the 'Nordic Macro' section for more details.

The 60 second overview

The missing market catalyst: markets remain in a wait-and-see mode ahead of today's US CPI and ECB meeting and not least next week's FOMC meeting. This week yields have generally declined while equities, the USD, and broad commodity indices have moved sideways.

Trade war. In the first call under the Biden administration, US and Chinese commerce ministers yesterday agreed on promoting trade and investment ties. According to Chinese Commerce minister Wentao the two parts "exchanged views frankly and pragmatically on relevant issues and mutual concerns". News of the call come next to Biden revoking several of Donald Trump's executive orders targeting specific Chinese apps - albeit they were replaced with a new executive order more generally addressing apps linked for "foreign adversaries". The CNH currency gained on the news with USD/CNH now back around the 6.38 level.

Crypto history: yesterday El Salvador became the first country in the world to allow Bitcoin as legal tender. Under the new law Bitcoin will not be subject to capital gains taxes and can be used for paying taxes to the government. Proponents of the decision argue this is a strong step in a direction of promoting growth by improving financial integration in a country where few have access to financial services. Critiques, on the other hand, argue El Salvador is putting a pending IMF programme at risk by introducing a highly volatile means of payment into an economy heavily dependent on the USD. Also sceptics argue the decision increases the risk of money laundering and corruption in the authoritarian regime.

Equities: Equities fell slightly yesterday dragged down by US. Defensives outperformed cyclicals and growth beat value as the movement in bond market continues to dominate rotation within equities. In US, Dow -0.4%, S&P 500 -0.2%, Nasdaq -0.1% and Russell 2000 -0.7%. Asian markets are characterised by gains this morning with European and US futures also higher.

FI: Global bond yields declined yesterday ahead of the ECB meeting and the US CPI data this afternoon. The decline in yields is a bit surprising given the expected rise in US CPI and the supply of US Treasuries, but there was solid demand at the 10Y US Treasury auction yesterday.

FX: FX moves have been very subdued this week with daily moves in most majors currency pairs kept within the +/- 0.5 standard deviation band. GBP has traded modestly weaker alongside commodity currencies. On the other hand, industry sensitive currencies in MXN, CNH and SEK have all gained - albeit still only mostly. EUR/USD remains just below the 1.22 level.

Credit: Though equities finished the day mostly unchanged, credit did well and Xover tightened 2½bp (to 240bp) and Main ½bp (to 48½bp). HY bonds tightened 1bp and IG bonds ½bp.

Nordic macro

Inflation will take centre stage in Scandinavia as we - quite unusually - get all three monthly releases on the same day today.

Swedish May CPIF inflation is expected to fall back slightly from what we consider to have been the peak in April. This is despite a significant rise in energy during May. Note that CPIF excl. Energy already peaked in January. We forecast CPIF and CPIF excl. energy in May to print 2.4 % yoy and 1.5 % yoy, respectively. That is 0.5 and 0.2 p.p. above the Riksbank's respective forecasts. Energy (mostly electricity) adds 0.2 p.p. to the monthly increase while clothing, recreation, and hotels/restaurants are the main contributors for the 0.3 p.p. increase in core CPIF. Looking forward we expect all inflation measures to dip significantly in June well below 2 % again.

In Denmark, we expect another increase in in CPI inflation to 1.7% y/y from 1.5% y/y in April. The big contributors are energy and package holidays. Oil prices have doubled in May compared to the same month last year, which adds significantly. The base effect will wear off from now on. Package holidays and air travel usually decline markedly in May and given the current imputation of these prices and the lower weight in the consumer basket this year on these items, this adds further to inflation in May; an effect that will reverse in June and in particular in July.

In Norway, core inflation has dropped since the autumn due to lower imported inflation. We expect it to continue to trend down, but driven more by base effects (high inflation at the same time last year). It will be interesting to see if there any signs of the downward trend being held back by prices for commodities and intermediates having risen faster in recent months. We think May might still be a little early for this, and therefore expect core inflation to fall to 1.9% y/y, whereas consensus is looking for 2.0 % y/y.