Economic news was to the solid side this week with not least euro area PMIs painting a stronger picture. The main surprise came from manufacturing PMI which increased from 45.7 to 47.4 (consensus 46.1) while the service sector stayed at a decent level of 53.3. The service report highlighted the strength of the labour market with the employment index moving up to 53.7, the highest in a year and clearly above the long-term average. It points to continued employment gains in an already tight labour market. The latter was also highlighted by data on negotiated wages for Q1, which moved back up to 4.7% y/y from 4.5% in Q4. A strong labour market and high wage gains it adds to the concerns over too high service inflation evident in the latest CPI numbers. Following the stronger data we have revised our ECB forecast for this year to only two cuts from previously three, see ECB preview - A political rate cut in June, and no cut in September, 24 May. US PMI for May also delivered an upward surprise driven by the service sector, where the index jumped from 51.3 to 54.8 (consensus 51.2).

The stronger economic data pushed bond yields up again as expectations for central bank easing was scaled back once again. An upward surprise in UK inflation during the week already started the upward move in yields. The 10-year US yield increased close to 10bp during the week. Stock markets were mixed seeing gains after the AI chip maker Nvidia showed impressive growth in revenues once again while the rise in yields sent markets back down on Thursday.

UK Prime Minister Rishi Sunak surprised everyone by calling a snap election to be held on 4 July. After 14 years of Conservative rule, polls and prediction markets indicate a Labour majority government led by Keir Starmer as the most likely outcome. 

Trade tensions continue to brew between China and EU as China this week sent some warning shots suggesting they could increase tariffs on imports from EU to 25% on large engine vehicles, a move that would mostly hurt Germany and could make EU auto makers move production to China instead. We are likely to have a decision on the EU investigation on Chinese EV's in the coming weeks and we continue to look for an increase in tariffs to 20-25% from currently 10%. On Thursday China launched a two-day military drill around Taiwan in a response to the inauguration speech by the new President Lai Ching-te on Monday, which had some twists moving the message more in the direction of Taiwanese sovereignty, which is China's 'red line'.

Focus the coming week turns to Euro inflation data for May, a key input ahead of the June 6 ECB meeting. We expect unchanged headline and core inflation at 2.4% and 2.7%, respectively. Focus will be on momentum in service inflation, which we expect to remain strong. In the Euro zone we also get unemployment, M3 as well as German ifo business confidence. In the US we get consumer confidence from Conference Board and core PCE inflation. In Japan we also get inflation for Tokyo in May.

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