Norges Bank set to hike, Riksbank expected to hold steady

In focus today

In Norway, we expect Norges Bank to raise the policy rate by 25bp to 4.25%. The March meeting indicated a rate hike was likely at one of the forthcoming monetary policy meetings, with the rate path suggesting a higher probability for June. However, the hawkish stance, aimed at re-anchoring inflation expectations, supports an earlier move. Given this, we see little reason for Norges Bank to delay the increase, particularly as two of the five committee members had already voted for a rate hike at the March meeting. Additionally, Statistics Norway will release Q1 wage figures, where monthly data point to annual growth slowing to 3.5%, noticeably below this year's wage estimates. This suggests that wage drift from late last year into this year may have been weaker than anticipated.

In Sweden, we expect the Riksbank to leave the policy rate unchanged at 1.75%. However, they may adopt a more hawkish tone compared to their March meeting, acknowledging the increased upside risks to the inflation outlook.

From the US, Q1 flash productivity data and the April Challenger Report on layoff announcements are set to be released later this afternoon.

In the UK, attention will be on local elections, where the Labour Party may face a significant setback, potentially increasing pressure on PM Starmer to resign. Gilt markets are sensitive to this outcome, as it could signal a shift towards a more lenient fiscal policy. The Conservatives are also anticipated to face substantial losses, raising questions about whether this election could signal a transition to a multi-party system.

Economic and market news

What happened overnight

The US-Iran conflict has seen significant developments, with diplomatic efforts to end hostilities gaining momentum. Iran is reportedly reviewing a US proposal to end the war, while President Trump has conveyed optimism about the discussions, describing them as "very good" and hinting at the possibility of an imminent agreement. However, key issues remain unresolved, including Iran's nuclear programme and the reopening of the Strait of Hormuz. The prospect of a peace agreement has already impacted global markets, with oil prices dipping and shares rallying amidst hopes of resolution.

In the oil market, Brent crude briefly fell below USD100/bbl yesterday and trades around USD102/bbl this morning - a sharp drop from USD114/bbl earlier this week. Prices have dropped amid speculation of a US-Iran deal to reopen the Strait of Hormuz for oil shipments. While past negotiations have led to disappointment, a failure could trigger a price rebound. If an agreement is reached, Brent could decline further, potentially settling at USD90-95/bbl.

What happened yesterday

In the US, the ADP National Employment Report's April reading of +109k private sector jobs aligns closely with consensus expectations (+99k), showing stable employment growth. While a strong figure, the increase was anticipated due to weekly "pulse" estimates during the reference period. This suggests a steady labour market, with limited surprises for economic forecasting.

In the euro area, the ECB's wage tracker indicates that negotiated wage growth is slowing, forecasted to drop from 3.0% in 2025 to 2.6% in 2026, likely easing services inflation and core inflation pressure. Second-round inflation effects from wages are likely to emerge only in 2027 if the ECB decides to hike rates this summer, based on anticipated wage-driven inflation rather than current services inflation trends. This approach highlights the central bank's forward-looking strategy in addressing inflation risks. Final PMIs for April revealed a modest improvement over preliminary figures, with services rising to 47.6 from the initial estimate of 47.4, which lifted the composite PMI to 48.8.

In Sweden, April's flash inflation data revealed a sharper-than-expected decline, with core inflation at 0% and CPIF at 0.8% y/y, below forecasts. The downside surprise stemmed from lower services inflation and energy prices alongside a noticeable pass-through of VAT reductions to food prices (-5.5% m/m) fell short of forecasts, indicating potential deflationary pressures. This data may influence the Riksbank's monetary policy stance, as inflation trends diverge from expectations.

In Norway, Norwegian house prices increased by 0.6% month-over-month in April, surpassing Norges Bank's forecast of 0.2%. While partially influenced by Easter effects, the annual growth rate of 3.8% remains below wage growth, highlighting the restrictive impact of monetary policy. Additionally, the vacancy rate rose to 3.0% in Q1, the highest since Q1 2025, underscoring strong labour demand and a tightening labour market. Despite these developments, the cost of re-anchoring inflation expectations appears manageable, supporting Norges Bank's cautious approach.

In Poland, the National Bank of Poland kept its policy rate decision unchanged at 3.75%.

Equities: Equities rallied yesterday on renewed optimism for a reopened strait, particularly in energy-deficient countries. While a deal and an open strait have long been reflected in equity pricing, the anticipated timing for the opening has been moved forward. The Stoxx 600 surged 2.2%, Japan is rallying 6% this morning, and the S&P 500 climbed 1.5%. Europe still sits 2% below its pre-war high. If Iran approves the deal, there could be even more room for equities to run. All cyclical sectors outperformed, including technology, industrials, materials, and consumer discretionary. Among defensives, real estate led the way as rates corrected. Notably, technology was the top performer among cyclicals, with semis jumping 5% (AMD up 19% on strong earnings, and Intel, Nvidia, Oracle each rising around 5%). One might have expected greater momentum in more energy-intensive sectors on a day dominated by peace hopes. However, this underscores that markets are forward-looking and already factoring in other fundamental drivers.

FI and FX: EUR/USD spiked initially higher yesterday following the optimism around US-Iran talks and lower energy prices, but reversed part of the gains later in the session. The report implied a (gradual) reopening of the Strait of Hormuz and an end to the US blockade of Iranian ports, with nuclear talks coming later in the outlined process. Brent oil initially declined below the 100 USD/barrel mark and yields fell markedly with the 2Y EUR swap down 15bp at its lowest point. Later news sources citing Iranian officials called parts of Axios' report speculation, and we remain skeptical that a comprehensive deal is yet within reach. Focus today will be on the Riksbank and Norges Bank meetings. We expect the Riksbank to stay on hold at 1.75% but communicate a slightly more hawkish message compared to the March MPR, despite yesterday's low inflation print. At the interim Norges Bank (NB) meeting we expect a 25bp hike in policy rates while markets price 12bp worth of hikes i.e. close to an unusual coin-flip pricing. We also expect NB to verbally guide markets towards a second hike in June.