May PMIs are today's main event

In focus today

In the euro area, focus turns to the May PMIs. The economy has started the year on a strong footing with composite PMI above 50 in the past two months. We expect that the service PMIs will remain around the 53 level while the manufacturing sector should rebound slightly to 46, still indicating weakness. We will look out for especially the services price and employment indexes as these remain strong, leaving upside risks to domestic inflation, and in turn may reduce the ECB's rate cut appetite in the second half of the year.

We also receive Q1 2024 negotiated wages for the euro area. Inflation expectations are well anchored, and recent indicators suggest a cooling in wage growth to around 4% in Q1. The treatment of one-offs leaves upside risks to the Q1 print together with the robust labour market. Finally, we also look out for the May consumer confidence.

We also look out for PMIs from the US and UK. In the evening, Atlanta Fed's Bostic (voter) will be on the wires.

In Turkey, we expect the central bank to hold the policy rate unchanged at 50% today, in line with consensus. Headline inflation remains close to 70% y/y and the still strong monthly momentum in underlying inflation gives all the reason for CBRT to remain vigilant. The central bank has communicated that further tightening would take place in case of a significant and persistent deterioration in inflation which we do not see at the moment.

In Japan, April inflation data is released early Friday. Inflation has been stable between 2-3% for a while and monthly price growth has also aimed nicely with the inflation target. In March, momentum did however slow and Tokyo data indicate further modest price growth in April.

Economic and market news

What happened overnight

In Japan, the manufacturing PMI came in at 50.5 in May (prior 49.6). This means that factory activity expanded for the first time in over a year. The service sector is still leading the expansion, even though it fell to 53.6 (prior 54.3).

What happened yesterday

In the US, the minutes of the FOMC meeting showed that Fed officials said that they had faith that price pressures would ease over the coming months. However, various officials said if inflation started to surge, they would be willing to hike borrowing costs again. The market's interpretation of the minutes was somewhat hawkish with a small sell-off in risk and broad USD strengthening.

Nvidia came out with stronger than expected figures after the close posting Q1 revenues of USD 26.0B versus an estimate of USD 24.69B and increased guidance for Q2 revenue sending the stock up over 5% afterhours. However, no spill-over to broader markets.

In the UK, In the UK, inflation in April surprised significantly to the top side across the board, relative to both the consensus expectation and the Bank of England's (BoE) forecast. Headline came in at 2.3% y/y and services a 5.9% y/y. The underlying momentum remains strong with the big driver being a broad range of services. Service inflation remains key for the BoE as it uses it as a measure of inflation persistence. Worryingly, alongside the big BoE forecast miss, the momentum in service inflation also picked up in April. Following the top side surprise and the May print unlikely to deliver an equally large downside surprise to sway the majority of the Monetary Policy Committee to vote for a cut, we now expect the first 25bp cut in August (prev. June). Read more in Bank of England - Revised BoE call - Hot service inflation spells trouble, 22 May.

Likewise in the UK, the Conservative UK Prime Minister Rishi Sunak announced that a snap general election will take place on 4 July 2024. While the consensus was for an autumn election, we do not expect the timing to be a game changer. At present, the Labour Party is set to win by a majority according to both polls and prediction markets, and this is well-priced in by markets. Overall, we expect the market impact of the UK general election on 4 July to be fairly muted with both parties firmly campaigning on the notion of delivering economic stability and the likelihood of another event akin to the "mini"-budget event being unlikely.

In China, the government is considering increasing import tariffs as high as 25% on large gasoline powered vehicles as trade tensions ramp up between China, and the US and euro area. At the moment, China imposes a 15% import tariff on such cars. An increase could hit German carmakers such as Mercedes and BMW, which exports such cars to China. Their shares dropped by over 2% on the news.

Further on China, British defence minister Grant Shapps accused China of providing or preparing to provide Russia with lethal aid in its war against Ukraine. The revelation follows a visit by Russian President Vladimir Putin to China last week for two days of talks with Chinese President Xi Jinping. We will monitor how China responds to the accusation.

Market movements

Equities: Global equities were lower yesterday without any significant news to direct the markets. Notably, both energy and materials dipped, with oil decreasing by 1.5% and industrial metals sharply lower. Tech and large-cap growth outperformed, even preceding Nvidia's earnings. In the US yesterday, the Dow fell by 0.5%, the S&P 500 by 0.3%, Nasdaq by 0.2%, and the Russell 2000 by 0.8%. This morning, Asian markets are mixed, with Japan leading the gains while Chinese stocks are lower in both mainland China and Hong Kong. US futures are higher, propelled by tech and reactions to Nvidia's earnings. European futures are also gaining, albeit not to the same extent as in the US.

FI: The surprisingly high UK inflation print in the morning shifted the entire yield curves 2-3bp higher across the board-– and after the initial reaction yields traded in a very tight range with 10y German yields ending at 2.53%, with very little difference to the other euro area jurisdictions. That also means that the long end supply from Austria (15y) and Portugal (30y) as well as the French linker were well absorbed in markets. US markets were largely ignoring the FOMC minutes released last night, in which it amongst others said that "Although monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictivenes'’.

FX: The USD firmed yesterday with a final leg lower in EUR/USD after the FOMC minutes. Later, after Nvidia delivered another strong result and set a positive tone for equities futures, the USD rebound somewhat faded while EUR/SEK dropped back toward 11.60. NOK/SEK remains just above parity and just below resistance levels as EUR/NOK has been relatively stable. EUR/GBP moved sharply lower alongside relative rates after the UK inflation which surprise on the upside and suggests Bank of England rate cuts will be postponed.