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European markets for the second consecutive day enjoyed an interludium of calm after last week’s turbulence. There was little ‘new news’ from the political scene in France. Jordan Bardella of the far right Rassemblement National (RN) in an interview said his party needs an absolute majority in order to realize its program. At the same time, he indicated that his first move as prime ministers would be to execute an audit of public finances to determine its room for policy. It’s doubtful whether this will be enough remove markets’ uncertainty on the country’s fiscal path going forward. Still, intra-EMU spreads of France (and other countries) versus German Bunds narrowed slightly (France -3 bps, Italy -5 bps, Greece -5 bps, Portugal and Spain -3 bps). With safe haven demand fading (at least temporarily) German yields tentatively rose a few bps this morning (up 3.5bps). German ZEW confidence disappointed (cf infra) but initially had little impact on EMU yields. However, any tentative rise in yields on both sides of the Atlantic was blocked as US May retail sales for the second month in row surprised to the downside. Headline May sales grew only 0.1% M/M (vs a downwardly revised -0.2% M/M in April). Control sales (which is seen as a pointer for overall consumption in the GDP release) rebounded a slightly softer than expected 0.5%, but last month’s figure was also downwardly revised (-0.5%). Later in the session US May industrial production data printed much stronger than expected (0.9% VS 0.3% expected). Still, it only slightly mitigated the market reaction post the retail sales report.

After last week’s softer US price data, markets see today’s retail sales as further evidence that the supply-demand balance is moving better in line with what the Fed deems necessary to return inflation to the 2% target. US yields in a steepening move currently decline between 5 bps (2-y) and 1.5 bps (30-y). Markets are a moving ever closer to a scenario of the Fed delivering two 25 bps rate cuts this year (90%). For now US yields are holding above last week bottom levels. German yields after the US data swapped modest morning gains to change between +1.0 bp (2-y) and -1.5 bps (30-y). US equities are little moved by the sales data. The S&P 500 and Nasdaq open almost unchanged, with record levels still within striking distance. The Eurostoxx 50 rebounds 0.5%, but he technical picture remains fragile as the index struggles to sustainably regain the previous range bottom (4884 area). On FX markets, the dollar returned initial gains but basically trades little changed in a daily perspective (DXY 105.4, EUR/USD1.073). EUR/GBP hovers in a tight sideways range between 0.8445 and 0.8460 as investors are looking forward to the UK CPI/price data tomorrow, the BoE policy decision on Thursday and May retail sales scheduled for release on Friday.

News & Views

German ZEW investor expectation rose marginally in June from 47.1 to 47.5. While being the highest level since February 2022, consensus expected a bigger jump to 50. In contrast, the assessment of the economic situation in Germany has slightly deteriorated. The corresponding indicator fell from -72.3 to -73.8 (vs -65 expected). ZEW president Wambach added that inflation expectations of respondents increased which is likely related to the May increase inf inflation. The financial market experts’ sentiment concerning the economic development of the EMU increased from 47 to 51.3. The situation indicator for the eurozone remained unaltered at -38.6.

The National Bank of Hungary slowed the pace of interest rate cuts from 50 bps to 25 bps as they cut the policy rate from 7.25% to 7%. Lower inflation figures had to be balanced against a tougher risk climate which pushed the EUR/HUF cross rate dangerously close to 400. The statement and press conference of vice-governor Virag will follow later today including updated growth and inflation figures. Last month, Virag suggested little scope for more rate cuts after this June move. The forint profits in a first move with EUR/HUF returning below 395.


DXY trade-weighted index: dollar keeps recent gains even as soft retail sales fuel Fed rate cut bets.


EUR/HUF: forint rebounds as MNB slows pace of rate cuts from 50 bps steps to 25 bps.


US 10-y yield nearing 4.20% support area as retail sales suggest consumer demand might be cooling.


Brent oil reversing post-OPEC+ decline even as uncertainty on demand persists.


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