Israel strikes Iran, raising tension before US talks

In focus today

In the euro area, we receive industrial production data for April. Industrial production surged by 2.2% q/q in Q1, mainly driven by front loading of exports to the US from Ireland, which recorded a 32% m/m increase in February and 45% m/m in March. Excluding Ireland, production rose 1.0%, which is still stronger than late last year. April's data may be influenced by Ireland's volatility and US tariffs, warranting careful interpretation.

US releases preliminary consumer confidence for June from University of Michigan. It has taken a big hit in recent months but is expected to increase slightly on the back of lower oil prices and stronger equity markets. Focus will also be on inflation expectations, which increased sharply in recent months and moderated only slightly in May.

In Sweden, we get the details of the May inflation numbers at 8.00 CET. Flash estimate last week showed core inflation (CPIF ex Energy) at 2.5% y/y, 0.2pp below the Riksbank's forecast from March (but in line with our own). The reason for the deviation from the Riksbank's forecast is likely the government's extended tax deduction for home renovations, suggesting a neutral impact on forecasts.

On Monday, China releases key monthly batch of data for May, including retail and home sales, home prices and industrial production. We look for more of the same with sluggish retail sales around 5% y/y, a tentative bottoming in home sales and still robust industrial production around 6%. China navigates the US trade war with stimulus supporting the economy, yet unable to ignite strong recovery or consumer growth.

Economic and market news

What happened overnight

In the Middle East, Israel's attack on Iran's nuclear and military sites has caused oil prices to surge by 9% to USD 75.65 per barrel. This occurs just days before US-Iran nuclear negotiations set in Oman for Sunday. Yesterday, Trump commented that negotiations were "fairly close to a pretty good agreement" and expressed his desire for Israel to refrain from attacking Iran, as it might jeopardise the prospects of a deal. The attack adds significant uncertainty to diplomacy, with US officials denying direct involvement while cautioning that it could either hinder or, unexpectedly, pressure Iran towards discussions.

What happened yesterday

In the US, May PPI ex-food and energy rose modestly by 0.1% m/m, below the expected 0.3% m/m, echoing the subdued CPI results from yesterday despite tariffs. Furthermore, the services PPI, excluding trade, transportation, and warehousing, remained slightly negative for the second consecutive month. Coupled with the weak services CPI reported yesterday, these indicators suggest that underlying price pressures, excluding tariff distortions, continue to be contained. Continuing jobless claims experienced a slight uptick, reaching 1.956m from the previous 1.904m. It was the highest level since 2021 suggesting the unemployment rate is heading higher.

Trump has intensified pressure on the Fed, warning that he might be "forcing something" if interest rates are not lowered. He reiterated his call for a deep rate cut of 1 percentage point, aiming to reduce borrowing costs and save the US hundreds of billions annually on its debt. However, Trump clarified he would not fire Powell before his term concludes in May 2026.  

In Norway, the Q2 regional survey shows that aggregate output matches market and Norges Bank expectations at 0.4% for Q2 and Q3, with capacity utilization stable at 35%, indicating normal levels. Employment growth is expected to remain at 0.2%, reflecting a cautious labour market approach. However, investment growth projections have decreased significantly, with 2025 expectations falling from 0.5% to -0.9%, and next year from 0.8% to 0.1%, indicating reduced business optimism. Wage growth forecasts align with Norges Bank's predictions, suggesting stability. Overall, these factors point towards a likely rate cut in September.

Equities: A rather counter-intuitive session in equities yesterday. Despite a string of softer-than-expected US macro releases, global equities managed to close marginally higher as US stocks advanced during the session. The combination of lower-than-expected PPI prints and initial/continuing jobless claims drove yields notably lower, particularly in the long end, flattening the US curve. From a pure macro standpoint, this should not have been equity-positive - and in many ways, the internals confirmed this, with defensive sectors outperforming and the VIX ticking higher. Part of the lift came from a different direction altogether: political news out of the US suggesting a stronger push for bank deregulation, which helped lift bank stocks significantly.

Another key point: Relative to other regions, US macro data continues to underperform - and FX movements supported that narrative yesterday. The softer USD helps export competitiveness, and we saw that theme quietly support parts of the equity market as well. In the US yesterday, Dow +0.2%, S&P 500 +0.4%, Nasdaq +0.2% and Russell 2000 -0.4%. Fast forward to this morning, and the tone has shifted dramatically. Reports of Israeli strikes inside Iran overnight have rattled global markets. Brent crude surged by nearly 10%, sending Asian equities sharply lower and pushing European and US equity futures down 1-2%.

FI and FX: Sharp rise in the crude oil price and equity futures firmly in red after Israel's strike on Iran. EUR/USD which was supported by tariff jitters and benign US inflation data and printed a fresh year high at 1.1630 yesterday is back at 1.1530. Treasuries had another strong session with US10Y dropping firmly below 4.40%, while the Fed September contract indicates -25bp (week started at -17bp). USD/Scandies have bounced up again after they also printed new year lows yesterday. EUR/SEK has erased all losses from yesterday amid renewed risk off and is back at 10.96, whereas EUR/NOK remain at 11.50.