Market movers today
The key focus today is the G20 summit starting in Osaka. Although the long-awaited meeting between US President Trump and Chinese President Xi is only scheduled for tomorrow (3:30 CEST), headlines surrounding the summit, especially on the topic of trade and military tensions with Iran will drive sentiment today. The odds have been rising for a ceasefire in the trade war after Trump reached out to Xi last week, but the risk of Trump increasing tariffs if the summit does not bring any progress still haunts.
On the data front, the most important release today is the June euro area HICP print. In May, core and headline inflation disappointed markets. For the June print, we expect euro inflation to continue its roller-coaster ride, as base effects remain in the driver's seat and we look for core inflation to jump back to 1.2% (see more in EUR inflation roller-coaster continues , 18 June).
Inflation figures will also be in focus across the Atlantic with the PCE core print for May. The Fed lowered its inflation forecast significantly at the latest meeting and low inflation is one reason it has become even more dovish.
In Scandinavia, we get Swedish wage growth and retail sales figures, while in Norway employment data is in focus (see next page).
Selected market news
The talk of the town continues to be the G20 meeting starting today, with the highlight being the 90-minute lunch meeting tomorrow between Trump and Xi. It's a high-stake and much-awaited meeting and the outcome will give an indication of how risk will fare in the near future. Yesterday, the WSJ reported that China will insist on the US lifting the Huawei ban as part of a trade truce. Further, the report suggested that China could be ready to put restrictions on rare earth exports to the US unless the ban is lifted. That would be a way to retaliate against the US for the attack on Chinese tech. China has not yet retaliated but may have chosen to wait for the G20 to see if Xi could get Trump to lift the ban first. See also China Weekly Letter: Rising chance of ceasefire at G20 meeting , 21 June.
The Swedish May trade balance showing a SEK8.3bn surplus was very strong. Export growth remained strong at 10.3 % y/y, but an important reason for the strong figure is also that imports fell, -1.7 % y/y. The trade balance is partially strong for the wrong reasons.
Euro area data yesterday was mixed. The Spanish inflation figure was slightly on the low side at 0.6% vs. 0.9% in May while German HICP was in line with expectations at 1.3%, which led us to revise down our expectations for today's euro area figure. The European sentiment indicator showed a further dip in June across sectors (though consumer and service confidence remained relatively stable).
As Q2 is coming to an end, we published a piece on the Euro area - Catching up with reality , where we conclude that investors should brace for more negative economic surprises in the coming weeks. We expect GDP growth in Q2 to fall back to 0.2% q/q; for more see Euro Area - Catching up with reality .
Scandi markets
A few data releases remain this week. First, wage growth data, which does not usually show much volatility and hovers around 2.5% y/y. That’s too low to please the Riksbank and some board members have expressed the view of adjusting wage formation to allow for a slight higher wage increases (not a popular stance among employers). Second, we get May retail sales. Keep in mind that the April data was very strong (+1.9% m/m) so some correction is likely. From a more general perspective, household consumption has been quite weak this year.
In Norway, we finally get the June unemployment figures from NAV. All leading indicators, for both the labour market and the wider economy, point to growth holding up and to further strong demand for labour. Therefore, we expect registered unemployment (seasonal adjusted) to drop back to 2.2% in June. The growing shortage of skilled labour nevertheless spells a risk that unemployment will not fall much further.
Fixed income markets
US Treasuries led the rally in the global bond markets as the uncertainty over a trade deal increases. Initially, 10Y German government bond yields rose on the back of higher-thanexpected CPI data, but European sentiment indicators continue to indicate a weak economy. Increased uncertainty regarding a possible trade deal between China and the US at the G20 meeting supported the long end of the US yield curve.
The key economic data releases are the EU inflation data for June and the US PCE data for May. The core PCE deflator is expected by consensus to rise 1.5% y/y and thus continue the falling trend seen for most of 2019. This will keep the pressure on the Federal Reserve to ease and with the uncertainty regarding the trade deal, there is room for a further decline in 10Y US Treasury yields going forward
FX markets
There is relative calm in FX markets ahead of the G20 meeting in Osaka. Both the Scandies and USD have been reasonably steady, while the JPY and CHF have strengthened a tad. Expectations have been upped for Saturday’s meeting on trade between Trump and Xi and a ceasefire could temporarily give some tailwinds to risk currencies such as EM and the Scandies and weigh further on the USD. However, central banks are nevertheless still likely to set the tone for currencies heading into Q3 with a range of important policy meetings coming up in July. Next week, the Riksbank will be first in this respect: the SEK could invoke on a renewed trend of weakness if the Riksbank shows the market it is willing to follow the ECB on adopting a clear easing bias. Today, focus will be on the G20 and on inflation data out of both the US (PCE) and the euro zone (HICP): a key driver of FX markets at present is, in our view, the relative credibility of inflation targets - and notably the ECB is being challenged by the market in this respect and we expect the euro will drift higher if it does not deliver.
Key figures and events
