Weekly focus – Reopening of Hormuz amid hawkish Fed

Danske Research Team Danske Bank A/S

The main market mover this week was the signing of a memorandum of understanding to work towards a permanent peace deal between the US and Iran. The interim agreement ends all military actions and opens the Strait of Hormuz (SoH) while the two sides negotiate a final agreement in a "maximum" of 60 days. Traffic through the SoH show early signs of normalisation, but markets still watch how quickly supply returns and progress on the final deal, where especially the question of Iran's stockpile of nuclear material remains a sticking point. The spot price of Brent crude is down to around USD 80/bbl compared to USD 70/bbl before the war.

The US Federal Reserve remained on hold at 3.50-3.75%, as expected, with Warsh's first meeting delivering a much shorter statement without forward guidance but no surprises on the balance sheet policy. Warsh did not submit projections, but projections from the other members revealed a clear hawkish bias, with nine members pencilling in rate hikes this year and six of them seeing more than one, alongside higher inflation forecasts. The meeting marked a clear step away from traditional forward guidance, but Warsh emphasized a firm focus on bringing inflation back to target. Markets reacted hawkishly with significantly higher US Treasury yields and a weaker EUR/USD, now pricing in a more front-loaded probability of hikes.

The Bank of England (BoE) kept the Bank Rate unchanged at 3.75% as widely expected. The decision was taken with a 7-2 vote, with Pill and now also Greene voting for a hike to "insure against the possibility of larger second-round effects". We expect an unchanged Bank Rate for the coming year while markets are pricing in a full hike by year-end. In Japan, the Bank of Japan (BoJ) raised its policy rate by 25bp to 1.0%, the highest since 1995. The vote split was 7-1, and BoJ signalled further rate hikes and outlined a gradual reduction in JGB purchases, effectively pausing QT from 2027. Market reaction was modest, leaving USD/JPY just above 160.

In terms of data releases, the US retail sales figures rose more than expected, marking a fourth consecutive strong month as households stepped up car purchases despite higher petrol prices. In the euro area, the final May inflation data confirmed the surprisingly strong services inflation print of 3.6% y/y and the details revealed that it was indeed a strong print, not only driven by one-offs or seasonality that could be expected to reverse in June. China's latest monthly releases underscored a deepening two‑speed economy. Retail sales fell from 0.2% y/y in April to -0.6% y/y in May, while property investment slumped further and new home prices continued to decline, albeit sales appear to be stabilising. In contrast, industrial production accelerated to 4.5% y/y from 4.1% y/y fuelled by strong exports.

Next week, the key data releases to look out for are the June flash PMIs for the big economies. We also get the US PCE inflation for May and euro area consumer confidence as well as ECB's consumer expectations survey.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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