EU TRANSPORTATION: Air France-KLM: 5y

The Swedish flash Q2 GDP indicator was weaker-than-expected at 0.1% Q/Q (vs 0.3% cons, -0.24% prior). As always, a generous pinch of salt should be taken with this indicator, it can be heavily revised and is often a poor predictor of actual GDP outcomes (Q2 due at the end of next month). The market reaction has been relatively limited for now.

• The 0.1% reading was significantly below the Riksbank’s June MPR projection of 0.9%. We suspect that the extremely weak May retail sales report, which also pulled down the May monthly GDP estimate, has had a large role to play here.
• June retail sales are due tomorrow, which will also reveal whether May’s -4.8% M/M is revised.
• June monthly GDP was 0.5% M/M (vs a downwardly revised -0.8% prior from -0.2% initial). However, no details are released today.
• Despite its caveats, the message from the GDP indicator is consistent with an economy that is still a little subdued despite 200bp of Riksbank cuts. It leans in favour of market expectations for one more cut this year. The July flash CPI report (due next Friday) may be important in determining whether an August cut is still on the cards.
• While trade policy uncertainty has reduced since the US-EU struck an agreement at the weekend, the terms of the deal would still exert a toll on Sweden’s export-sensitive economy. 

• MNI: ECB 1-YEAR CONSUMER INFLATION EXPECTATIONS 2.6%
• MNI: ECB 3-YEAR CONSUMER INFLATION EXPECTATIONS 2.4%

1-year ahead consumer inflation expectations eased two tenths to 2.6% in June, having now fully reversed the rise to 3.1% between February and April. Three-year ahead expectations were unchanged at 2.4%, with 5-year ahead expectations at 2.1% for the seventh consecutive month. 

• 5-year ahead expectations are in line with market pricing of 5y5y EUR inflation swaps (currently 2.13%). However, shorter-dated swaps price a sub-2% inflation rate over the next few years, in line with the ECB's June projections.
• President Lagarde's only reference to inflation expectations at last week's ECB press conference was in relation to a question about undershooting the 2% target. She noted that "Now, you will always find two or three governors who are very concerned about undershooting. But what I say to you is that undershooting is actually in our projections, in the staff June projections. It’s there. But what matters is our medium-term target because this is the objective that we have reaffirmed in our strategy and which is definitely 2%. And when I look at inflation expectations, it is strongly anchored around 2% in the short term but also in the longer term. So that’s as far as undershooting is concerned."