US FOMC meeting takes the evening spotlight

In focus today

• The main event will be in the US with the FOMC meeting this evening. We expect no changes to the policy rate in line with consensus and market pricing. FOMC participants will likely adjust their 2025 GDP forecasts lower due to the trade war, while other forecasts will see more modest adjustments. We expect the Fed to resume rate cuts from September and cut twice in 2025 followed by three more cuts in 2026 - slightly faster than what the March 'dots' implied. Read more from our Fed preview: Still on the sidelines, 13 June. 
• Fears of a wider conflict are growing in Middle East as it is starting to look increasingly likely that the US will get involved in the ongoing fighting between Israel in Iran. Apparently, Trump's inner circle, similarly as the Republican Party, is divided by the issue of whether to intervene or not. The US Director of National Intelligence, Tulsi Gabbard, who is known for his interventionist policy approach has said Iran was not close to having a nuclear weapon, but Trump has openly challenged her.
• In the euro area, the final HICP data for May is released, which is expected to confirm the flash release. As services inflation drove the decline in May it will be interesting to see the measures of underlying inflation like 'LIMI' and 'super core' since the Lagarde has put more emphasis on these still elevated measures at the June meeting amid headline inflation undershooting the 2% target and staff projecting 1.6% inflation next year.
• The Riksbank's rate decision is also due this morning at 09:30 CET. While consensus expectation is on a 25bp cut to 2.00%, we maintain our call for an unchanged policy rate and instead expect a cut later this summer in August. Historically the guidance from the Riksbank has been clearer ahead of policy rate cuts, although overall a cut in June or August makes little difference to the overall economy.

Economic and market news

What happened overnight

In Japan, May exports came in at -1.7% y/y (cons: -3.8% y/y). The print was stronger than expected, although the details also revealed that Japanese automakers were shouldering the bulk of tariff costs. Total exports to the US fell 11.1%, the value of automobile exports to the US were down 24.7%, while automobile volume to the US declined only 3.9%. Japan has yet to reach a trade deal with the US as tariffs continue to weigh on big automakers.

What happened yesterday

In the Middle East conflict, US Vice-President JD Vance said that US President Donald Trump may decide to take further action to end Iranian uranium enrichment. Trump also seemed somewhat unwilling to enter negotiations, adding that Iran giving up entirely would be a satisfactory outcome. At the same time G7 countries, including the US called for a de-escalation of the conflict and so a possible Trump involvement remains an open question.

In the US, retail sales were slightly weaker than expected on the headline, but actually a bit stronger than expected when looking at the 'control group' sales (the 'core' measure of retail sales). Overall, there were no big surprises in either direction though. The details were a bit to the soft side. Spending on discretionary categories, such as restaurants & bars and electronics & appliances declined, which could be a sign of consumers turning a bit more cautious with their spending behavior.

In Germany, the ZEW index rose more than expected in June in a positive print for the German economy. The expectations component rose to 47.5 (cons: 35.0) from 25.2 while the assessment of the current economic situation rose to -72.0 (cons: -75.0) from -82.0. The expectations component has now almost fully recovered from the 'Liberation Day' decline in April. The current situation remains very low in a historical perspective, but on a positive note, the small upward trend is continuing, leaving the index at the highest level in a year. We expect the German economy to stagnate in both Q2 and Q3 after a strong increase in the first quarter of the year, partly boosted by front-loading of exports to the US. We forecast 2025 GDP growth at 0.3% y/y.

In Sweden, the official labour market data (LFS) for May revealed a weaker-than-expected labour market. Employment declined to 5.231M from 5.261M in April, the unemployment rate SA climbed to 9.0% from 8.5% in April (cons: 8.6%). Employment is better than the Riksbank's forecast from March and one possible reason for the higher unemployment figure is likely an increase in the labour force, which makes the data slightly less soft than the headline numbers would otherwise suggest.

FI and FX: Rising tensions in the Iran-Israel conflict and weak US retail sales led to another day of negative risk sentiment yesterday. Equity indices fell by 0.5-1.0% across Western markets, and most of Asia is also showing blinking red this morning. US Treasury yields ended lower across the curve despite a significant increase in oil prices throughout the day. The Brent price closed up by USD4 at USD76.5/bbl., the highest level since February. The rise in oil price pushed EUR/USD below 1.15, while EUR/NOK continued its downward trend, closing at 11.41. USD/JPY remained relatively steady following the largely uneventful BoJ meeting. EUR/GBP moved higher ahead of today's CPI figures.