Markets
The euro zone’s four largest economies released May inflation data on Tuesday, revealing mixed but broadly upward trends. On a monthly basis, price growth decelerated slightly, though annual inflation rates advanced in most countries. France saw inflation rise 0.1% month-over-month to 2.8% year-over-year (from 2.5%), reaching the highest level since February 2024. Spain matched the monthly pace of price increases but climbed to 3.6% year-over-year (from 3.5%), marking its second-highest rate since May 2024. Italy reported a 0.4% monthly rise, pushing its annual inflation to 3.3%—the highest since September 2023. Germany was the outlier, with inflation declining 0.1% month-over-month to 2.7% year-over-year (from 2.9%). Aggregate euro zone inflation data aligned closely with consensus estimates, with the KBC Nowcast model projecting a 3.3% year-over-year rate (up from 3%) for the region, the highest since September 2023. This divergence from the ECB’s 2% target strengthens the case for tightening monetary policy. Goods inflation is forecast to accelerate to 0.9% year-over-year, supported by rising commodity prices, while services inflation is expected to edge higher to 3.2% (from 3%) despite moderating inflation expectations. Core CPI figures, which exclude volatile components, are anticipated to rise to 2.4% (from 2.2%), reinforcing the probability of a 25-basis-point rate hike at the June ECB meeting. Italian central bank governor Panetta, typically aligned with dovish views, signaled that the outlook may necessitate a “rate recalibration” amid concerns over persistent inflation. Additional ECB officials have cited depleting fuel reserves and rising inflation expectations as justification for policy tightening. ECB Simkus became the first policymaker to hint at a second rate hike, suggesting it is more probable than not, though timing remains unclear. EMU money markets lean toward a staged approach, favoring a follow-up move in September. However, if energy crisis pressures persist, back-to-back hikes may become the favored strategy.
Market activity remained subdued on Tuesday ahead of U.S. President Trump’s potential endorsement of the interim Iran deal. Brent crude traded near $92 per barrel. Core bond yield curves saw minimal volatility, with UK gilts outperforming after Bank of England Governor Bailey indicated willingness to accept temporary inflation overshoots. The euro/USD pair hovered around 1.1650, while equity markets displayed cautious optimism.
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The Swiss Kof economic barometer rose marginally to 98 in May from April’s 97.8, following a sharp decline in March. Despite this modest recovery, the outlook for the Swiss economy remains tepid, as the index stays below its long-term average. Sector-specific indicators revealed divergent trends: manufacturing activity faced headwinds, while financial and insurance services showed resilience. Foreign demand indicators improved, but private consumption slowed. The Swiss franc weakened against the euro from the 0.90 level to a range between 0.90 and 0.925 (currently 0.9125) since mid-March, as the Swiss National Bank emphasized a readiness to intervene in foreign exchange markets to support inflation targets. The next SNB monetary policy decision is scheduled for June 18.
Sweden’s Q1 GDP contracted 0.2% quarter-over-quarter but grew 2.0% year-over-year. Key drivers included a 0.8% boost from inventories and 0.6% household consumption growth. Gross fixed capital formation fell 2.3% quarter-over-quarter, primarily due to declines in construction and building investments. General government consumption dropped 7.6%, and net exports provided a marginal drag (-0.1%) as imports outpaced exports. The report follows a strong Q4 2023 performance, driven by elevated central government spending. Sectoral analysis showed a 0.2% decline in business sector value added, with goods-producing industries rising 1.1% offset by a 0.8% contraction in services. Government value added also fell 0.2%. Despite stable household spending, the mixed data bolsters the Riksbank’s cautious stance, as policymakers await clarity on geopolitical and supply chain risks. The central bank’s next meeting on June 17 is expected to hold rates steady, though markets have priced in a 75% chance of a 25-basis-point hike by August. The Swedish krone has stabilized, with EUR/SEK trading near 10.78 after a mid-May decline from 11.00.