Weak 40-year JGB auction

In focus today

The minutes from the FOMC's May meeting are due for release this evening. As the meeting was held before the US-China trade deal, the minutes are likely already somewhat outdated. Since the meeting, FOMC participants have broadly called for patience before resuming rate cuts, which we expect to continue only in September.

We will receive retail sales and trade balance data in Sweden today. Retail sales have been strong despite weak consumer confidence. Additionally, we will get the Financial Market Statistics from Statistics Sweden. The Riksbank is releasing their financial stability report, which includes their analysis and assessment of stability in the Swedish financial system.

Note that Danske Morning Mail will not be published tomorrow and Friday. Instead, we highlight that Thursday's focus will primarily be on US data, including the second estimate of GDP and PCE core for Q1. Friday will be more eventful kicking off with Swedish Q1 GDP figures, and May inflation data for Germany, Spain and Italy - potentially echoing the dovish French print we received yesterday. The week wraps up with US personal spending and the first release of PCE inflation - the Fed's preferred measure of inflation - for April, where consensus points to an easing of price pressures.

Economic and market news 

What happened overnight

The Reserve Bank of New Zealand (RBNZ) cut its Official Cash Rate by 25bp to 3.25% as expected by both markets and consensus. The committee had considered both cutting and keeping rates unchanged but voted 5-1 in favour of cutting. RBNZ notes that there is still spare productive capacity in the domestic economy and that the tariffs and increased policy uncertainty will likely end up weighing on both growth and inflation pressures over the medium-term. The rate path was revised slightly lower, and it now implies a modest risk of RBNZ cutting rates below 3% next winter. NZD/USD was relatively little changed.

In Japan, demand at the auction of 40-year Japanese Government Bonds (JGB) fell to the lowest level since November, reflected in a 10bp rise in the 30y JGB yield this morning - following a sell-off in long-end bonds this month. The auction was seen as a bellwether of appetite from large institutional investors, who have yet to fill the gap left by the central bank's reduced purchases. JGBs were already in focus following a Reuters story yesterday that reported the Ministry of Finance (MoF) had circulated a survey to JGB market participants regarding issuance amounts - widely interpreted as a precursor to the MoF tweaking bond supply to avoid further strain in the JGB market. The ministry is reportedly set to decide following discussions with market participants in mid- to late June.

What happened yesterday

In the US, April durable goods orders were to the soft side at -6.3% m/m (prior: 7.6%), largely due to Boeing's large aircraft orders in March. Conversely, defence orders rebounded sharply. Excluding both the aircraft and defence categories, underlying capital goods orders declined 1.3% m/m (prior: 0.3%), which could be explained by tariff uncertainty/a reversal of the post-election optimism. Hence, the decline was not as significant as the headline suggests, also supported by the fact that the order level remains above the 2024 average.

While the Michigan survey pointed towards further deterioration, the Conference Board Consumer Confidence surprised to the upside, rebounding to 98 (cons: 97, prior: 86). Importantly, the cut-off dates for the measures differ - the Conference Board survey was conducted about a week later, on 19 May (Michigan Survey: 13 May) and reportedly, as many as half of the responses were collected after the US-China deal announcement on 12 May. Assessing the report, consumers' inflation expectations ticked lower, and respondents were less pessimistic about business conditions and job availability over the next six months. Generally, consumer sentiment remains very sensitive to trade war news, but underlying behaviour has evolved much more steadily.

In the euro area, French inflation data for May came in lower than expected, at 0.6% y/y (cons: 0.9%, prior: 0.9%). The main driver of the easing was a downtick in services inflation, which fell to 2.1% y/y (prior: 2.4%) - offering some comfort to the ECB. Energy prices also declined, contributing to the dovish surprise. In addition, the absence of price pressures in goods continued, implying that core inflation is on a downward trend. Notably, France is the first country to release inflation data ahead of next week's euro area figures - and this softer print supports the expectations for a lower aggregate measure.

In Sweden, the NIER survey barometer indicator was largely unchanged. After declining in recent months, the household confidence indicator showed a slight increase, though it is still at very low levels. The manufacturing confidence indicator was almost unchanged - and industrial companies reported limited or no-impact from any turmoil related to tariffs. Price plans were slightly better - especially when looking at the domestic plans. All in all, the release was relatively neutral, and we continue to believe the Riksbank will wait for more data and keep the policy rate unchanged in June.

In Hungary, the central bank maintained the policy rate at 6.50%, as widely expected.

In commodities space, OPEC+ is reportedly likely to agree on a further accelerated oil output hike for July. While the group meets today to review the market, a policy change is not expected. However, a decision on increasing output is anticipated when the eight OPEC+ members convene on Saturday. At the time of writing, Brent crude is trading around USD 64/bbl. We expect Brent to average USD 70/bbl in Q2 and recover to USD 85/bbl in Q4 - though we note there is room for prices to fall significantly further amid additional output hikes from OPEC+.

Equities: US markets rallied on Tuesday, as investors caught up after holidays on Monday. In one go, most of last week's losses and defensive rotation is thereby recouped. S&P 500 surged 2.1% in a big breadth; all sectors 1-3% higher and only 34 companies in red. This was a cyclical rally, which contrasted with the trading regime last week. What is more interesting is that the small cap and growth preference hung in there for a second day, fuelled by lower long-end yields of course. Retail investor favourites like Tesla and Nike surged, together with most-shorted and tariff-exposed names. The US rally is not trickling down to Asia or futures this morning, which suggest a slow opening today.

FI and FX: The USD rebounded together with equity markets yesterday as the worst trade war fears in the market calmed further. Consequently, EUR/USD fell back towards the 1.13 level. The global bond market also fared well yesterday with both US, German and Japanese yields declining. In Scandies, SEK struggled yesterday and lost out to most of G10 currencies. EUR/SEK rose back towards 10.90 and briefly spiked towards the 11:00 figure.