• The US inflation and ongoing US-China trade frictions have been the main global market drivers today. Both of them have increased markets expectation of monetary policy easing.
  • US CPI inflation in May came in below expectations (1.8% YoY, consensus 1.9% YoY, previous month 2% YoY), supporting the markets view that there is room for the Fed to cut rates if escalating trade tensions continue to weigh on US economic outlook. Market implied probability of a Fed rate cut in July increased to 82% while the US 5y5y forward inflation swap declined, hitting its lowest level since 2017.
  • On the trade front, the uncertainty over whether Trump and Xi will meet at G-20 left investors unnerved. Despite Mnuchin confirming the meeting, the White House as well as the Chinese authorities have declined to comment on any such plans.
  • In China, while headline CPI inflation picked up for the third straight month in May, led by food prices, core CPI as well as PPI inflation remained subdued, reflecting lacklustre demand pressures.
  • In bond markets, the softer US inflation outturn impacted short term yields relatively more than the long term yields. The UST 10Y yield fell following the release of the inflation data but rapidly trimmed partially its decline, ending slightly lower. On the other hand, the US 2Y Treasury Note decreased significantly with the US 10-2Y yield slope steepening, in turn reflecting rising investor expectations of Fed rate cuts in the near term and boost economic growth. In Europe, bond yields remained flat across the board, although ECB’s official showed a dovish tone. Italy’s risk premium widened ahead of the Eurogroup meeting, amid the country trying to persuade the EU to postpone a decision on whether to open disciplinary procedures over its finances until after the summer, as it awaits tax data.
  • The US dollar was range bound, reversing the depreciation driven by a tame inflation. The TRY trimmed early depreciation after Turkey’s Central Bank maintained its policy rate unchanged, as expected, while the increasing expectations of Fed monetary policy easing also helped to support the TRY. Meanwhile, oil prices dropped sharply amid rising worries over slowing demand and US supply glut.
  • Equity markets in Europe fluctuated in a narrow range where the inflation data injected some risk appetite, trimming slightly today’s losses.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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