Ongoing conflict between Isreal and Iran

In focus today

Strikes in Iran and Isreal are continuing to escalate with Isreal claiming control of Teheran airspace yesterday. Israel has expanded its bombardment of Iran and is now also targeting critical energy infrastructure. Iran is responding with its largest ever missile assault but has so far abstained from actions that would disrupt or devastate global energy markets. Join us in a 30-minutes briefing What's next in the Middle East where our experts walk you through the current situation and what to expect going forward today at 10:30-11:00 CET.

In the afternoon, US retail sales and industrial production data are due for release for May. Consumer sentiment has improved after the US-China trade deal in mid-May according to the latest surveys, but retail sales data will provide more tangible evidence if that has truly been the case. The latest hard data point from April showed households' savings rate ticking higher as a sign of rising caution. 

On the data front from Germany, we will receive the ZEW index for June. Expectations rebounded in May following the April 'liberation day' plunge. We expect a further improvement in June as the trade war risk has eased. Amid rising expectations, we expect the assessment of the economic situation to remain low.

In the morning for Sweden, we will receive the official labour market data (LFS) for May. We expect a modest decline in employment (m/m) and a similarly small increase in the unemployment rate, to 8.6%, which would be in line with weaker labour demand indicators such as new vacancies. Additionally, the National Institute of Economic Research (NIER) will release their new macroeconomic forecasts today, which are highly valued by the forecasting community.

Economic and market news

What happened overnight

In Japan, the Bank of Japan left rates unchanged this morning by a unanimous vote, as widely expected. With an 8-1 vote, they decided to keep the current tapering pace in place until March 2026 but reduce it from then on, also as expected. This means, the current bond purchase of about JPY4 trillion per month will be reduced to JPY3 trillion by March 2026 and JPY2 trillion by March 2027. The market reaction has been very muted on the decision.

We continue to see scope for a rate hike in October, even if recent market pricing has pushed the next rate hike into early next year. Upcoming wage data confirming the solid negotiated pay hikes in the spring and perhaps a trade deal with the US might give room for a clearer picture going forward. Around 07.30 CET, we will listen in to the press conference, when Governor Ueda balances continued high inflation driven by food and the risk from the trade war.

What happened yesterday

In energy markets, oil prices declined to USD 73 per barrel - up only 3 dollars compared to before the initial attack. The decline was due to news that Iran could be looking to de-escalate the conflict with Israel. If the situation starts to calm, we expect oil prices to fall back further, as focus would shift from the oil market and return to the trade war and the potential for further OPEC+ output increases. Yet, tensions remain high as Trump left a G-7 meeting to return to Washington, D.C. to focus on the conflict, while calling for an evacuation of Tehran.

In China, the batch of data for May showed a solid revival in retail sales, however also a weakening housing market. Stimulus continues to keep the Chinese economy afloat amid the US-China trade war, likely keeping growth close to the 5% target level this year.

Equities: Equity markets rallied broadly across regions yesterday in what looked like a rebound - or perhaps more precisely - a reversal of Friday's moves. Cyclicals outperformed defensives rather clearly, and energy stocks were notably weaker, following a decline in oil prices. One point worth noting is that the pharma sector underperformed on both sides of the Atlantic. In the US yesterday, Dow +0.75%, S&P 500 +0.94%, Nasdaq +1.52%, Russell 2000 +1.12%. This morning, the picture in Asia is mixed, with Japan leading the way despite the Bank of Japan telling it will cut its bond buying program in half starting 2026. As expected, the BoJ kept rates unchanged. Futures in both the US and Europe point lower ahead of the open.

FI and FX: Risk sentiment improved through yesterday's session as Iran was reported to seek and end to hostilities. Oil prices dropped following the announcement, though attacks from both sides have continued. Euro rates fell, with short-end tenors prompting a bullish steepening of the 2s10s swap curve. Meanwhile, US Treasury yields continued their upward trajectory, driven by rising inflation breakeven levels. The DXY index edged down as EUR/USD briefly surpassed the 1.16 threshold. EUR/SEK and EUR/NOK remained largely stable throughout the session, while USD/JPY climbed. The Bank of Japan maintained its policy rate at 0.5%, signalling a deceleration in JGB purchases from April 2026. The yen experienced minimal impact, with USD/JPY trading at 144.5 this morning. However, overnight risk sentiment has deteriorated following President Trump's call for an evacuation of Tehran.