Norges Bank, BoE and SNB to hold, US-Iran in focus

In focus today

• Eyes remain on the US-Iran agreement this weekend. While the talks were expected to take place in Switzerland today, the Swiss foreign minister has stated that they will not go ahead. The deal has been virtually signed, and markets will be watching closely to see how implementation and the tougher follow-up negotiations develop in the coming days. Focus will also be on developments in the oil market and whether shipping flows through the Strait of Hormuz begin to normalise.

Economic and market news

What happened overnight

In energy markets, oil prices are falling as traffic through the Strait of Hormuz shows early signs of normalising, according to Vance, who notes that more than 12 million barrels have exited the Strait so far, with no Iranian fire on commercial ships and the US allowing vessels through its blockade. Brent crude has dropped below USD 77/bbl. this morning, close to pre-war levels. While markets still watch how quickly supply returns, the main driver today is the stronger USD, as expectations of Fed hikes in H2 make oil costlier for non-USD consumers and weigh on demand and prices.

In UK politics, Greater Manchester mayor Andy Burnham comfortably won the Makerfield by-election, defeating Reform UK's Robert Kenyon and securing a seat in parliament. The result paves the way for him to challenge PM Starmer. "Everyone knows that politics isn't working," he said in his acceptance speech. "Tonight could, just could, be the turning point". Burnham, on Labour's left wing, has pledged to respect existing fiscal rules, but worries in Gilt markets are kept very much alive.

What happened yesterday

In Norway, Norges Bank left the policy rate unchanged at 4.25% in a unanimous decision but maintained a cautious hawkish bias. The new rate path now signals 2-3 hikes this year, with one 25bp move clearly indicated in Q3 and about a 20% probability of another in December. The committee noted that the outlook is broadly unchanged but judged that "it will likely be necessary to raise the policy rate further at one of the forthcoming meetings". Minutes showed some members argued for a hike yesterday, but uncertainty about the impact of the May increase favoured a hold.

In the UK, the Bank of England kept the Bank Rate unchanged at 3.75% in a 7-2 vote, with Pill and Greene favouring a hike to insure against second-round effects. Mann stayed in the majority but was flagged as more concerned about inflation than other hold members. Governor Bailey said he is "content at the present time with holding". Softer-than-expected core inflation at 2.6% in May, falling food inflation and still gradually cooling labour market indicators supported patience. For details see Bank of England Review - On hold as hawkish arguments remain scarce, 18 June. The April/May labour market report looked somewhat stronger, with wage growth rising to 3.4% in the three months to April, unemployment edging down to 4.9% and May payrolls up 2k, reversing recent declines.

In Switzerland, the SNB kept its policy rate unchanged at 0%, as widely expected, and maintained its FX intervention guidance. The inflation forecast was only slightly higher and still within the price stability range, signalling muted underlying pressures and an overall message in line with our expectations. EUR/CHF moved higher, likely as markets had expected a more hawkish signal. Markets now price around 12bp of tightening by March 2027, whereas we do not expect any hikes from the SNB.

Equities closed generally higher yesterday, with several indices again close to new all-time highs, in what looked like a reversal trade after Wednesday's FOMC meeting. The important part was not only the index level, but the rotation underneath. We saw very large sector rotations, equally large regional rotations, strong cyclical outperformance, and notably both mega caps and small caps outperforming at the same time.

That fits very well with our strategy. The current combination is almost exactly what we have been looking for: very strong macro data, a fading geopolitical risk picture, and a sharply lower oil price reducing inflation pressure and therefore central-bank fears. In other words, the way the equity market is now rotating is almost tailor-made for our preferred allocation.

The simplest expression of that trade since we published our strategy on 10 June is striking: energy sector is down more than 5%, while tech sector is up more than 5%. That is probably the most important equity trade to get right at the moment.

With oil below USD 80/bbl, and with several supply-related stories pointing in the same direction, including Kuwait's progress in restoring oil infrastructure and ability to ramp production, the disinflationary impulse should continue to support appetite for growth and momentum equities.

This morning, Asian futures are lower, and both European and US futures are also softer. Note that the US cash market is closed today.

FI and FX: The US-Iran interim peace agreement has gone into effect, with Brent Crude hovering below USD 80/bbl. as the US lifted its blockade of the Hormuz Strait. US bond yields went lower over yesterday's session, with 10Y UST now back to levels seen prior to Wednesday's FOMC meeting. The 2Y UST yield remains higher compared to before the FOMC meeting and in Europe there has also been modest flattening of the yield curve between 2Y and 10Y. The SNB, BoE and Norges Bank all kept their policy rates unchanged as widely expected. The SNB noted that that medium term inflationary pressures were virtually unchanged compared to March and only lifted the inflation forecast marginally across the forecast horizon. The lack of hawkish guidance pushed EUR/CHF slightly higher. The Norges Bank forward guidance strongly prepared markets for a hike in Q3 and a 20% probability of another hike in Q4. GBP weakened slightly yesterday amid a lack of hawkish guidance from the BoE and despite a strong labour market report out in the morning. Greater Manchester mayor, Andy Burnham won the Makerfield by-election which increases the risk of more fiscal spending, which we see as a GBP negative. There are no major key figures today, but several speeches from ECB members.