CZECHIA: Goldman Sachs’ View on Underlying CPI More Dovish Than the CNB’s

Some highlights from the S&P Global report on Canada Services PMI (link), which showed a broad improvement vs April (45.6 vs 41.5 prior): 

• "Canada’s service sector contracted again during May in line with ongoing uncertainty related to tariffs and the broader macroeconomic environment."
• "Both activity and new business fell markedly, albeit at reduced rates as confidence showed some improvement compared to earlier in the year. "
• "Marginal jobs growth was also registered, which helped explain a further contraction in backlogs of work. "
• "Latest data indicated an acceleration in input price inflation and the biggest rise in output charges for a year. Tariffs remained a source of price pressures, according to service providers. "
• "Tariffs also had a noticeable effect on international sales, with new export business declining sharply again in May (albeit to the weakest degree since January)."
• "Confidence amongst service providers improved during May to its highest level since January. There were hopes that the business environment will be more stable in a year’s time and will lead to some organic business growth."

• RES 4: 6124.00 High Feb 24     
• RES 3: 6080.75 High Feb 26  
• RES 2: 6057.00 High Mar 3
• RES 1: 6008.00 High May 29 
• PRICE: 5985.75 @ 14:19 BST Jun 4  
• SUP 1: 5850.75/5765.62 20- and 50-day EMA values
• SUP 2: 5596.00 Low May 7  
• SUP 3: 5455.50 Low Apr 30
• SUP 4: 5355.25 Low Apr 24 

The trend condition in S&P E-Minis is unchanged, it remains bullish and the contract is trading just ahead of its recent high. A print above 5993.50 last week, the May 20 high and a bull trigger, highlights a resumption of the uptrend and maintains a price sequence of higher highs and higher lows. An extension would open 6057.00 next, the Mar 3 high. Key support lies at 5765.62, the 50-day EMA.

Markets price a ~50% implied probability of a 25bp Riksbank cut on June 18, so tomorrow’s flash May inflation report (due 0700BST/0800CET) will be closely watched to help begin shaping consensus ahead of that event. Despite piercing support from the trendline drawn from the April 9 low last Friday, bullish conditions in NOKSEK have re-asserted themselves, helping the cross back to the medium-term pivot level of 0.9500. A weak CPIF ex-energy print would expose the May 27 high at 0.9548.

• The Riksbank projected May CPIF ex-energy at 2.68% Y/Y in the March MPR, but analysts pencil in a slightly softer 2.6% Y/Y reading after 3.1% in April.
• In its Spring budget bill, the Government temporarily increased the subsidy rate for the tax deduction on own home repairs from 30 to 50%. This was not incorporated in the Riksbank’s March projections, and is expected to pull monthly CPIF ex-energy down by 0.2pp between May and December.
• Services and manufacturing expected prices ticked higher in the May Economic Tendency Indicator, but there was a more notable pullback in retail expected prices (which nonetheless remain elevated). Meanwhile, April PPI saw momentum slow across components. Given the still soft economic outlook, the Riksbank’s view that the Q1 acceleration in inflationary pressures was temporary appears intact.
• The Riksbank expects headline inflation at 2.27% Y/Y, but consensus sees a firmer 2.5% Y/Y print (vs 2.3% prior). This appears to be due to a base effect on electricity.
• No details will be provided in the flash release, with the final report due on June 13 (still before the Riksbank meeting).
• See below for a selection of analyst comments: