Last week’s optimism about reopening the Strait of Hormuz faded this week, as US and Iranian officials downplayed the prospect of a deal and military action flared up again, including in Lebanon. The price of oil is back above $97 For Brent. In our new economic forecasts published this week, we assumed a very gradual return of oil prices over several years in line with market prices, implying that there is some progress in the passage of shipments through the Strait but no real solution soon. Obviously there are risks in both directions of this.
Economic data from the United States was on the positive side This week, with the ISM survey pointing to increased manufacturing output and employment, higher-than-expected job openings, and the ADP informal employment report showing 122,000 private sector jobs added in May. However, the most important data point will be Friday’s jobs report. The US economy continues to be strengthened by technology-related investments, which is also reflected in the stock market, where technology stocks continue to perform strongly. The US Treasury announced the outcome of a so-called Section 301 investigation in 60 economies related to forced labor, paving the way for replacing the current 10% tariffs when they expire on July 24. However, these definitions are also likely to be challenged in the courts. Currently, net revenue from tariffs is close to zero, with income being matched by refunds of tariffs previously found to be illegal. Hence, US fiscal policy is more expansionary than intended, which is part of the reason we now expect the Fed’s next move to be to raise interest rates.
In the Eurozone, inflation in May rose to 3.2% y/y as expected, but perhaps higher Worryingly for the ECB, services inflation has risen To 3.5% from 3.0% on an annual basis, which is a greater increase than can be explained by technical factors such as the timing of Easter. Very weak May Purchasing Managers’ Index (PMI) numbers for the services sector were revised down significantly, but the overall figure of 48.5 still points to contraction. The European Central Bank has indicated very clearly that it will raise interest rates by 25 basis points at its meeting next weekwhich will also provide updated economic forecasts. This dilemma likely reflects the same dilemma that appeared in the May data, which is that the economy is weakening but inflation is rising, both linked to higher oil prices than in the bank’s latest scenario from March. Therefore, there is still uncertainty about whether and when interest rates will be raised again, but we do not expect to get clear guidance from the ECB on that.
A series of other central banks will follow interest rate announcements. At the Federal Reserve, Kevin Warsh will host his first news conference as chairman. He expressed skepticism about guidance tools such as the so-called dot chart of FOCM members’ expectations which is scheduled to be updated at this meeting. However, expectations are growing for interest rate hikes in the fall.
We expect the Bank of Japan to raise interest rates to 1%, the highest since 1995. The hawks on the Policy Council have become more vocal lately, and real wage growth is finally turning positive.
Weekly Focus will not be published next week, so the next issue will be on June 19.
