Markets
US May CPI inflation printed near consensus. Headline CPI rose by 0.5% M/M with the annual figure breaching the 4% mark for the first time since April 2023 (4.2% from 3.8%). Core inflation increased by 0.2% M/M (vs 0.3% consensus) while picking up from 2.8% Y/Y to 2.9% (highest since September of last year). Details showed energy prices rising by 3.9% M/M (23.5% Y/Y) with gasoline being the main culprit (+7% M/M & +40.5% Y/Y). Food price growth slowed to 0.2% M/M (3.1% Y/Y). Prices for services excluding energy increased by 0.3% M/M (3.4% Y/Y), primarily driven by shelter costs. Markets look at today’s numbers coming from last week’s strong growth/labour market data. The latter prompted further hawkish repositioning when it comes to this year’s Fed policy. From a momentum point of view, the lack of upward surprise today suggests that the current pricing should do going into next week’s FOMC meeting. A more neutral Fed stance is generally expected given the minor easing bias which still exists in the statement. Question remains whether new projections, both GDP/CPI and dot plot (if still released), make a stronger case for Fed action in coming months. Anyway, US Treasuries showcased some minor volatility around the time of the release with a minor strengthening bias. Daily changes on the US yield curve currently range between -0.4 bps (2-yr) and +1.3 bps (30-yr). EUR/USD oscillated between 1.1540 and 1.1560, but tries to regain some ground as the German/European yield curve bear flattens going into tomorrow’s ECB meeting. Yields add up to 3.5 bps at the front end of the curve. As the stalemate between the US and Iran drags on, the case builds for back-to-back action by the ECB. Recent fighting back and forth by both parties suggests that an interim deal isn’t in the pipe. The length of the conflict and energy shock suggests that applying just one 25 bps move looks silly and uncredible from a central bank point of view. Analysts point to the fact that significantly lower Chinese import volumes are currently the only thing standing in the way of oil prices returning north of $100/b.
News & Views
KBC Economics has revised up its forecast for the Czech policy rate from a status quo at 3.5% to two rate hikes towards 4% this year. A first move could come as soon as June. The revision is rooted in the extended disruption in the Strait of Hormuz, which is gradually feeding into higher energy prices. Natural gas in particular is a thorny issue with European storage levels at historically low levels (40%). Large household energy price resets at the start of next year and second-round effects (eg. food prices) loom with their impact peaking early 2027. Inflation could approach 4% by then. The underlying resilience of the Czech economy, underpinned by robust domestic demand, is a second key argument for the revised CNB outlook. The growth backdrop is accompanied by rapid expansion in investment lending and strong wage growth. KBC Economics considers inflation risks to have risen enough to justify a pre-emptive tightening response with a potential June move followed by another one in either August or November.
Norwegian headline inflation eased from 3.4% to 3.1% but the underlying gauge unexpectedly quickened to 3.4% – the joint-fastest since February 2025. The latter topped both analysts’ and the central bank’s own forecast. It cements another rate hike by the Norges Bank after having already raised the policy rate by 25 bps to 4.25% in May. The official March forecasts put the policy rate between 4.25% and 4.5% by the end of the year. Money markets assume the Norges Bank to pull the trigger again in September (95%). The policy meeting for next week is given an outside chance of just 25%. But then again, prior to the May gathering the market implied probability stood at no more than 50% as well. The Norwegian central bank’s Regional Network Survey is up for release tomorrow, serving as the final important input for next week’s policy meeting. The Norwegian krone after the CPI release recovered from a two-month low just north of EUR/NOK 11 to currently trade around 10.94.
