EUROPEAN INFLATION: EZ HICP Revised 2 Hundredths Lower in May Final Print

Goldman Sachs write “UK yields crept higher last week alongside an upside surprise to growth. Given ongoing evidence of labour market loosening and our expectation of a more rapid disinflation in the coming quarters, the UK is showing progress in moving out of the “low-growth, high-inflation” quadrant of the past years”.

• They note that “over recent years, and especially since the 2022 gilt crisis, this macro combination had led to higher risk premia vs. peers and a distorted gilt curve. But improved fiscal credibility and a better macro environment suggest the forward outlook for relative gilt risk premia is improving”.
• They think “that 10y10y Gilt yields in particular look elevated relative to the U.S. and that the risk of upcoming fiscal events (the U.S. budget reconciliation process and the UK’s Autumn Statement) skew towards relative Gilt outperformance”.
• As a result, they recommended entering 10y10y Gilts vs U.S. Tsys at 51bp, targeting 10bp, with a stop set at 71bp.

• Several phases of dollar sales accompanied the European open Monday, helping boost EUR/USD and GBP/USD through the overnight highs as well as the Friday highs in both pairs. The Moody's US downgrade remains the primary driver here, which spills over into Treasury yields and equities through the European cash open.
• JPY trades similarly well and outperformed in Asia-Pac trade, although gains have faded slightly into the NY crossover. GBP/JPY bounced well ahead of the intraday support at the Y192.58 200-dma.
• The overall size of these greenback moves are telling: a net of ~100 pips in EUR/USD on the sovereign downgrade signals that the deterioration in US credit worthiness was partially priced in through the recent tax bill headlines and tariff volatility - both of which remain a primary concern as they filter into hard economic data. US Treasury Secretary Bessent played down the ratings action over the weekend, noting Moody's - and ratings agencies more generally - were a "lagging indicator" of US fiscal health.
• A heavy session for Fedspeak dominates the calendar Monday, with the Atlanta Fed's Financial Markets Conference (set to continue until Wednesday) top of the agenda. Fed's Bostic, Jefferson, Williams, Logan and Kashkari are all set to make appearances.
• President Trump is set to hold a call with Russian President Putin later today, headed into which Putin reportedly believes he holds the upper hand in negotiations, meaning Russia are unlikely to offer any meaningful concessions as part of a peace deal. Market sensitivity to peace talks in Ukraine remains high, but no progress is expected in the very short-term.

Our Policy Team on the EC Forecast Update:

• The European Commission has significantly downgraded its Euro Area's growth and inflation outlook due to the weaker global trade environment as well as the continuing uncertainty surrounding US tariff policy.
• The EC revised EA growth for the year down to 0.9% for this year and to 1.4% for next year from the 1.3% and 1.6% forecast in the autumn. Inflation was also revised down to 2.1% and 1.7% in 2025 and 2026 from the 2.4% and 2.0% estimates made in the autumn forecast.
• Based its forecasts on certain assumptions around US tariff policy, specifically a 10% US tariff on EU exports, as had been the case until April 9, along with a 25% tariff on cars and steel and exemptions for pharma products and microprocessors. Brussels add that while the negotiated US-China tariff deal turned out lower than it had assumed, it was still big enough to cause a "big hit" to US-China trade.