Key Highlights

• U.S. conducts new strikes in Iran, denies report on draft peace deal MoU.
• Bank of Korea delivers a hawkish hold at 2.5%, with two dissenters voting to hike.
• ECB President Christine Lagarde warns of growing challenges to central bank independence.

Chart of the Day

ZAR well-bid ahead of anticipated SARB hike

^{Source: BNY}

The SARB is expected to reverse course and hike by 25bp today, taking its key rate back to 7%. The conflict has totally derailed the central bank’s profile, but conditions could be far worse. In the run-up to the last SARB decision, the prospect of weakening real rates was a key driver behind a very poor FX purchase profile. In contrast, ZAR is performing very well ahead of this decision, and the rolling three-month average is comfortably positive. The ceasefire may not have resolved supply issues but it has perhaps prevented severe deterioration. This is only half of the story, however, as the SARB clearly hopes to re-establish policy credibility with haste as core inflation picks up. That makes a hike necessary, and markets will also assess whether a stronger cycle is needed to ensure the lower inflation target is attainable.

The bar has been further raised by the prospect of the Fed moving toward a more hawkish stance, and this will be challenging for all carry currencies globally. Our biggest concern for ZAR is that its current flow vs. holdings position is totally at odds with every other currency, both in EM and DM, that we designate as “carry.” The currency is facing good inflows from a decent holdings position, which seems hard to justify given the risks of a more significant shift in the dollar’s holdings position. While we cannot rule out the SARB surpassing expectations very strongly, the wider FX carry environment is weak and the balance of risks points to a need for ZAR inflows to soften materially.

What's Changed?

The break in the uneasy truce, with more military conflict between Iran and the U.S., spelled gains for oil and USD higher, while stocks fell globally. The U.S. military ​said it had carried out new strikes targeting an Iranian drone operation, while Tehran said it had attacked a U.S. airbase in Kuwait. The rate markets are a key area of focus, with yields rising back over 5% for U.S. 30y paper and 4.5% for 10y. The Bank of Korea has joined the RBNZ in making a hawkish hold decision, adding to fixed income reversals. Central bank rate guidance biased toward hikes is as big a driver as oil volatility today. Fatigue has set in for equity and bond markets as they face month-end.

• Oil and energy: Alternatives to the Gulf States are in the spotlight, placing the focus on the U.S. EIA report later today. Satellite surveillance of the Strait of Hormuz oil facilities used for exports shows 90% closed. A 2.8 million barrel (mb) fall in U.S. API crude oil inventories was reported last week, following a 9.1mb drop the week before. It was also reported on May 22 that the U.S. strategic petroleum reserve had been tapped by 9.1mb, leaving 365mb in the reserve, the lowest since April 2024 and close to 50% of storage capacity. Gasoline showed a 3.2mb draw, keeping supply 5% below average, while distillate rose 1.1mb, equivalent to 9% below average. Today’s IEA report sees $3.4tn being invested in the sector, given the second crisis in five years. $2.2tn is expected to go into electricity and grids, storage, nuclear and alternatives such as wind. The remaining $1tn is for oil, gas and coal, but with just $500bn heading into new oil – the third y/y decline in investment in crude. There are major implications for autos, chemicals and other business.
• Equities, gold and mortgages: The record-high global equity markets paused overnight, while other markets saw concerns about demand. The U.S. mortgage rate rose to a nine-month high, adding to affordability concerns in housing. U.S. housing starts will be closely watched in this context. Gold has continued to slip, falling 2% to $4,390, which puts it at a two-month low as USD and CNY remain safe havens of choice ahead of the yellow metal. The role of financial conditions in driving U.S. and other developed-market demand is critical for central bankers as they seek to balance stagflation risk.
• Chinese lending and AI tokens: The PBoC issued informal guidance to some major state-owned banks last week as household and corporate loan demand has remained weak this month after lending unexpectedly fell in April. Banks have been tightening loan issuance to small and mid-sized private firms in light of rising loan defaults. The China CSI 300 was a standout exception to global share selling today, as Chinese semiconductor names including Hua Hong extended gains on continued Huawei chip sentiment. Notably, the Shanghai exchange is pushing for AI token futures, given that daily usage of such tokens in China surged to 140 trillion in March.

Bottom line: Today’s news agenda brings a host of economic data and a few key earnings reports led by Costco. The $44bn 7y bond sale will also be key given rebalancing of rates and stocks heading into month-end. USD gains today are the barometer for lower equities, tracking bond yields. The war and central banks guiding rates higher have zapped the momentum trade in risk today, and it remains to be seen whether this can shift on better data or another round of encouragement for peace deals. The pressure on U.S. markets is complicated by politics and the K-shaped economy. The role of the new Fed chair in balancing growth against inflation will be tested accordingly, with the push to scale back the balance sheet and reform the central bank part of the new narrative for June.

What You Need to Know

The Bank of Korea has held its policy rate at 2.5% with two members dissenting in favor of a hike, signaling a hawkish stance. The central bank sharply revised up GDP growth forecasts to 2.6% for 2026 (from earlier downside concerns) and 2.1% for 2027 (previously 1.8%), driven by semiconductor-led exports and investment. Inflation risks are broadening due to higher oil prices and stronger domestic demand, with the headline CPI forecast raised to 2.7% for 2026 (from 2.2%) and core CPI to 2.4% (from 2.1%). Forward guidance suggests a rate hike is likely as soon as July. KOSPI -0.53% to 8185, USDKRW -0.2% to 1502.45, 10y KTB +3.2bp to 4.107%.

Chicago Fed President Austan Goolsbee has stated that increased investment and spending driven by expected future productivity growth may fuel inflation and necessitate higher US interest rates. He warned that rising expectations of productivity gains could overheat the economy before such productivity improvements actually materialize, requiring rate hikes to prevent inflation. Goolsbee also noted that supply shocks could worsen inflation linked to anticipated productivity growth. He expressed cautious skepticism about the transitory nature of inflation caused by the Middle East energy shock. S&P Mini -0.12% to 7531, DXY +0.127% to 99.331, 10y UST +1.8bp to 4.501%.

Minneapolis Fed President Neel Kashkari has emphasized that fighting inflation remains the Federal Reserve’s top priority despite the labor market being in “decent shape.” He warned that persistent inflation risks unanchoring consumer expectations, potentially requiring more aggressive policy action. Key inflation drivers include rising energy and fertilizer costs, influenced by global factors such as the pandemic, tariffs and geopolitical conflicts. U.S. headline inflation stood at 3.8% y/y in April, with core CPI up 2.8% y/y. Kashkari also noted the uncertain impact of AI on productivity and monetary policy, highlighting the need for ongoing observation.

Federal Reserve Vice Chair Philip Jefferson expects inflation to ease later this year as tariff impacts and higher energy costs subside. However, he warned that inflation risks remain tilted to the upside, particularly due to rising energy prices linked to the Iran conflict. Jefferson noted signs of labor market weakness and is monitoring how energy cost increases affect consumer spending. He affirmed that the current policy stance, with interest rates held at 3.5-3.75%, is well-positioned to respond to evolving economic data and risks.

Japan’s ruling party is proposing issuing “bridging bonds” to fund key investment programs aimed at boosting growth and economic security, according to a draft proposal. These bonds, designed for temporary funding with guaranteed repayment sources, would help finance strategic sectors such as semiconductors and shipbuilding without worsening Japanese fiscal metrics such as the debt-to-GDP ratio. The proposal may form part of the government’s medium-term fiscal plan due in July. The move comes amid concerns over Japan’s large public debt and aims to balance expansionary fiscal policy against fiscal discipline. Nikkei -0.47% to 64693, USDJPY -0.051% to 159.46, 10y JGB +0.2bp to 2.701%.

What We're Watching

South Africa SARB interest rate decision: consensus for 25bp hike to 7.0%

U.S. April personal income forecast to ease to 0.4% m/m vs. 0.6% m/m. April personal spending is expected to ease to 0.5% m/m vs. 0.9% m/m.

U.S. April PCE Price Index is expected at 0.5% m/m, 3.8% y/y vs. 0.7% m/m, 3.5% y/y in March. April Core PCE Price Index is expected at 0.3% m/m, 3.3% y/y vs. 0.3% m/m, 3.2% y/y in March.

U.S. April preliminary durable goods orders forecast to rise to 3.9% m/m vs. 0.8% m/m. Durable goods ex transportation are expected to ease to 0.4% m/m vs. 0.9% m/m. Capital goods orders non-defense ex-air are expected to ease to 0.6% m/m vs. 3.4% m/m.

U.S. initial jobless claims forecast to rise to 212k vs. 209k.

U.S. Q1 revised GDP is expected to be unchanged at 2.0% q/q, from 0.5% in Q4. Personal consumption is expected to rise to 1.6% q/q vs. 1.6% q/q. The GDP price index is expected to hold at 3.6% q/q vs. 3.6% q/q. The Core PCE price index is expected to hold at 4.3% q/q vs. 4.3% q/q.

U.S. April new home sales forecast to ease to 660k vs. 682k, while building permits are expected at 1.442 million vs. 1.442 million.

Canada’s Q1 current account balance is expected to widen to -$4.2bn vs. -$0.7bn.

Central bank speakers: The ECB publishes the account of its April rate decision; the Bank of Canada releases its Financial Stability Report; New York Fed President John Williams and St. Louis Fed President Alberto Musalem speak at the Reykjavík Economic Conference; the ECB’s Isabel Schnabel speaks in Cologne.

U.S. Treasury sells $85bn in 4-week bills, $80bn in 8-week bills and $44bn in 7-year notes.

What iFlow is Showing Us

Mood: iFlow Mood drifted deeper into risk-off territory at -0.274, with global equities under selling pressure alongside increased buying of core government bonds.

FX: G10 flows were mixed, with large outflows from CAD, CZK and NZD offset by strong inflows into SEK and USD. Elsewhere, the broader iFlow universe posted moderate inflows, led by ZAR.

FI: Demand remained concentrated in Eurozone, Japanese and Chinese government bonds, alongside U.S. Treasurys, while outflows were focused in EMEA and LatAm sovereign bonds, particularly from Peru and Brazil.

Equities: Broad-based global equity outflows were led by Japan, Hungary, Hong Kong, Indonesia and South Korea. Selected inflows were seen in Norway, New Zealand, the U.S., China and Thailand. Within EM APAC, financials and consumer staples attracted light buying, while materials and consumer discretionary sectors faced aggressive selling.

Quotes of the Day

“When we are tired, we are attacked by ideas we conquered long ago.” – Friedrich Nietzsche

“Our fatigue is often caused not by work, but by worry, frustration and resentment.” – Dale Carnegie

Economic Details

EU external trade data for Q1 showed a marked weakening in exports, particularly to the U.S. Total EU exports to non-EU countries fell 8.8% y/y to €640.5bn, while imports were down 3.3% to €627.8bn. Exports to the U.S. – the EU’s largest export destination, accounting for 18.6% of total exports – dropped sharply, down 30.4% y/y to €119.4bn. This was the steepest decline of any major trading partner. Exports to Türkiye and China also fell, though less severely. On the import side, China remained the EU’s largest supplier with a 23.1% share, while imports from the U.S. shrank by 5.7%. Imports rose modestly q/q (+1.7%), whereas exports were broadly flat. Euro Stoxx 50 -0.36% to 6049, EURUSD -0.121% to 1.1612, BBG AGG Euro Government High Grade EUR +3.1bp to 3.242%.

The EU and euro area sentiment surveys for May showed economic confidence remaining weak despite modest stabilization. The Economic Sentiment Indicator edged up by 0.3 points in both the EU and the euro area, reaching 93.7 and 93.5, respectively, while the employment expectations indicator improved to 95.4 in the EU and 94.7 in the euro area. However, both measures remained well below their long-run averages of 100, signaling continued subdued economic momentum. Consumer confidence also recovered slightly after recent declines, with the EU flash indicator rising 1.7 points and the euro area measure up 1.6 points. Even so, confidence levels stayed deeply negative at -18.2 in the EU and -19.0 in the euro area. These figures are still below pre-Middle East conflict levels and highlight persistent concerns among households and businesses.

France’s industrial producer prices fell 2.0% m/m in April after a 2.2% rebound in March, while annual producer price inflation accelerated to 2.0% from 0.2%. The m/m decline reflected broad-based weakness across both the domestic market and export markets, largely driven by a sharp slowdown in energy-related prices after the March spike linked to Middle East tensions. Prices for coke and refined petroleum products still rose strongly, but growth slowed markedly to 4.5% m/m, from 52.3%. Excluding energy, producer prices increased by 0.7% m/m. Import prices for industrial goods also softened, rising 1.8% m/m after 6.1% in March, though y/y import price inflation accelerated to 7.6%. Electricity prices fell sharply, while chemicals and plastics prices continued to rise due to higher oil costs. CAC 40 -0.44% to 8172, EURUSD -0.215% to 1.1614, 10y OAT +2.4bp to 3.622%.

Italian consumer confidence improved in May, with the headline index rising to 93.4 points from 90.8 in April, while business confidence weakened as the composite indicator fell to 94.1 from 95.1. Among households, sentiment improved across most components, driven by more positive assessments of personal finances and expectations for the broader economy. The economic confidence index rose to 86.2 from 82.7, while the future expectations index increased to 87.2 from 82.5. In contrast, business sentiment deteriorated due to weaker confidence in market services and construction, while manufacturing confidence remained unchanged at 87.9 and retail trade improved marginally. Manufacturing firms reported better order assessments but rising inventories, while service sector indicators weakened broadly. Retail confidence was supported by stronger sales assessments and lower inventories, although sales expectations deteriorated. FTSE MIB -0.06% to 49551, USDJPY -0.026% to 159.48, 10y BTP +3.1bp to 3.736%.

Spanish retail sales slowed significantly in April, with the seasonally and calendar-adjusted retail sales index rising 0.8% y/y in real terms, down from 4.1% in March. On a m/m basis, retail sales fell 1.5% after seasonal adjustment, reversing the previous month’s gain. The decline was broad-based, with sales excluding petrol stations down 1.1%, food sales falling 0.3% and non-food sales dropping 1.7%, while petrol station sales plunged 4.1%. By region, retail sales increased in nine autonomous communities and decreased in eight, with Aragon recording the strongest y/y growth at 4.4%, while the Balearic Islands saw the largest decline at 2.1%. Employment in the retail sector remained resilient, rising 0.9% y/y, supported mainly by large retail chains. IBEX 35 -0.44% to 18321, EURUSD -0.215% to 1.1614, 10y Bono +2.2bp to 3.429%.

Sweden’s trade balance recorded a deficit of SEK 7.3bn in April, compared with a surplus of SEK 5.3bn a year earlier, as imports outpaced exports. Goods exports rose 8% y/y to SEK 183.5bn, while imports surged 16% to SEK 190.8bn. Trade with non-EU countries continued to generate a strong surplus of SEK 20.1bn, but this was outweighed by a SEK 27.4bn deficit with EU member states. Seasonally adjusted data showed the trade deficit widening to SEK 2.9bn from SEK 1.4bn in March. For January-April 2026, exports were broadly unchanged from a year earlier, while imports increased by 4%, causing the cumulative trade surplus to narrow sharply to SEK 5.7bn from SEK 36.2bn in the same period of 2025. OMX -0.94% to 3126, EURSEK -0.328% to 10.8078, 10y Swedish GB +5.8bp to 2.795%.

Swedish Q1 goods trade data showed exports falling 3% y/y in value terms while rising 3% in volume terms, with imports unchanged by value and up 4% by volume. The trade surplus narrowed sharply to SEK 13bn from SEK 31bn a year earlier, while exports and imports were broadly unchanged q/q. Export weakness was concentrated in shipments to the U.S., which fell 18%, mainly due to lower machinery and transport equipment exports. Exports to China also declined by 16%. By sector, wood and paper exports dropped 12% in value terms, while chemicals and pharmaceutical exports weakened by value despite stronger volumes. On the import side, electronics and telecommunications imports rose strongly, up 15% by value and 17% by volume.

Sweden’s Economic Tendency Survey for May showed broadly unchanged sentiment, with the headline barometer indicator edging up to 99.3 points from 99.2 in April, remaining consistent with a normal economic climate. Retail trade was once again the strongest sector, with its confidence indicator rising to 109.1, while household sentiment remained weak at 92.4 despite a slight improvement. Manufacturing confidence was stable and firms reported rising production volumes over the past three months. Construction firms became more optimistic about future order books, although views on current orders remained weaker than normal. A key feature of the survey was a marked increase in corporate pricing plans, with significantly more firms across most sectors expecting to raise selling prices over the next three months, indicating building pipeline inflation pressures.

Hungary’s labor market data for April showed employment remaining under pressure while unemployment was again elevated at 4.5%. The number of employed people aged 15-74 averaged 4.619 million in April, while the February-April moving average showed employment down by 55k y/y. Employment declined for both men and women, with the domestic primary labor market losing 72k workers y/y. The employment rate for the 15-64 age group fell to 74.7% from a year earlier. Unemployment averaged 219k people in the February-April period, with joblessness unchanged at 4.5% for both men and women. The average job search duration rose to 13.1 months, indicating a weakening labor market backdrop despite a 3.1% y/y drop in the number of registered jobseekers.

South Africa’s producer price inflation accelerated sharply in April, with headline PPI for final manufactured goods rising to 4.8% y/y from 2.3% in March, while producer prices increased by 3.0% m/m. The acceleration was driven mainly by coke, petroleum, chemical, rubber and plastic products, where prices surged 11.8% y/y and contributed 2.5 percentage points to headline inflation. Fuel-related products were particularly strong, with diesel prices rising 33.8% y/y. Intermediate manufactured goods inflation also strengthened to 10.0% y/y, supported by higher metals and chemicals prices. Mining producer inflation remained elevated at 24.9% despite easing vs. March, driven by non-ferrous metal ores. By contrast, agricultural producer prices remained in deflation at -6.5% y/y, reflecting continued weakness in crop prices, especially cereals. JSE TOP 40 -1.22% to 106196, USDZAR +0.259% to 16.4081, 10y SAGB +3.7bp to 8.685%.

Australian household spending fell by 1.1% m/m in April on a seasonally adjusted basis but rose 4.9% y/y. Spending decreased in six out of nine categories, with the largest declines in transport (-4.7% m/m), clothing and footwear (-2.2% m/m) and food (-1.3% m/m). Goods spending dropped 0.4% m/m, led by motoring goods, food and clothing. Services spending fell 1.9% m/m, driven by air, sea, rail and road transport and other services. Discretionary spending declined by 0.8% m/m, while non-discretionary spending fell 1.7% m/m, mainly due to motoring goods, food and transport. ASX -0.9% to 5598, AUDUSD -0.141% to 0.7124, 10y ACGB +4bp to 4.897%.

Australia’s private new capital expenditure rose 6.5% q/q, 14.6% y/y in Q1 vs. 0.7% q/q, 8.1% y/y in Q4 2025. Equipment, plant and machinery investment surged 18.1% q/q and 31.0% y/y, while buildings and structures declined by 3.8% q/q but increased by 0.8% y/y. The trend estimate showed a 4.3% q/q rise in total new capex, with equipment up 9.1% q/q and buildings down 0.1% q/q. Mining sector capex was stable, while non-mining rose 8.8% q/q.

New Zealand’s employment indicators for April showed a 0.2% m/m increase in seasonally adjusted filled jobs across all industries to 2.35 million. Actual filled jobs rose 0.5% y/y to 2.37 million, boding well for further normalization of the unemployment rate (Q1: 5.3%). By industry, health care and social assistance (+2.0% y/y), public administration and safety (+3.4% y/y), transport, postal and warehousing (+2.4% y/y) and agriculture (+2.2% y/y) saw gains, while manufacturing declined by 1.4% y/y. By region, Canterbury (+2.3%) and Waikato (+1.3%) led growth; Northland recorded a fall of 2.3%. Filled jobs for women increased 0.5% y/y, men 0.1%. Gross earnings rose 2.5% y/y to NZ$16.1bn. NZX 50 -0.16% to 13206, NZDUSD +0.137% to 0.5888, 10y NZGB +2.2bp to 4.615%.

Thailand’s Industrial Production Index (MPI) for April stood at 92.76 points, down 15.12% m/m, and 0.36% y/y vs. 1.30% m/m, 0.75% y/y in March. Capacity utilization eased from 64.61% in March to 56.41% in April. For Q1, MPI was up 0.83% y/y, supported by petroleum, automotive sectors, exports and tourism. Key industries in April showing significant m/m declines were automotive (-53.65%), food (-19.79%) and wheels (-23.81%), with mixed y/y performances. The industrial sector is expected to gradually recover in 2026, contingent on global trade policies and domestic demand growth. SET -0.36% to 1565, USDTHB -0.377% to 32.675, 10y TGN -2bp to 2.316%.

Taiwan’s overall business monitoring indicator remained at a “red” signal in April with a total score of 39, unchanged from March. The trend-adjusted leading index rose by 0.58%, marking ten consecutive months of increase. The coincident index increased by 0.84%, continuing an 18-month upward trend. The lagging index also rose by 0.75%, taking the uptrend to ten consecutive months. Key components showed mixed trends: export orders decreased slightly, while industrial production, wholesale and retail sales, and machinery imports increased. The government will continue to monitor the economic situation closely. TAIEX -1.4% to 43636, USDTWD -0.026% to 31.428, 10y TGB -2.5bp to 1.62%.

Hong Kong’s total exports and imports of goods rose by 42.9% and 44.4% y/y in April to $620.9bn and $650.4bn, respectively, widening the trade deficit to $29.5bn (4.5% of imports). For January-April, exports increased by 35.0% and imports by 38.9% y/y, spelling a $198.0bn deficit. Exports to Asia grew 43.7%, led by Singapore (+126.3%), Thailand (+84.7%) and mainland China (+40.7%). Key export commodities included electrical machinery (+49.5%) and telecommunications equipment (+54.6%). Strong global demand for AI-related electronics underpinned growth, though Middle East geopolitical tensions pose risks. Hang Seng +0.81% to 25591, USDHKD -0.022% to 7.8363, 10y HKGB -1.2bp to 1.417%.