EURIBOR: Positive Skew Affirms Lower ECB Rate View; EU-US Trade Deal In Focus

The Eurozone May flash inflation round kicks off with France tomorrow at 0745BST/0845CET. The data is being released so early this month because of Thursday’s Ascension Day holiday. Current consensus looks for annual HICP inflation to remain steady at 0.9% Y/Y, with a monthly rate of 0.1% M/M.

• The May flash PMI contained soft inflation details:  “Subdued demand conditions were a factor that weighed on companies’ pricing decisions during May. Not only did prices charged fall, but they did so to the greatest extent since January 2021. Discounting was broad-based by sector, underlying survey data revealed. According to panellists, prices charged were reduced as a result of lower interest rates, strong competitive pressures and promotional offers. Notably, output price reductions occurred despite a slight intensification of input price inflation”.
• Goldman Sachs expect French headline HICP at 0.8% Y/Y, with core to ease to 1.7% Y/Y from 1.9% prior. They expect “both core goods and services moving slightly lower on a year-over-year basis”. Specifically, they “expect an 11%mom nsa decline in the airfares component and a 2.6%mom nsa increase in package holidays, partly offset by recreational and accommodation services components”.
• Goldman look for “energy inflation to fall further to -7.9%yoy from -7.4%yoy in April, partly driven by a reported 6.4% gas price decline. We expect processed food inflation to go to 1.0%yoy (from 0.9%yoy in April) and unprocessed food inflation to decline to 2.5%”.
• Meanwhile, SEB write that “the April reading was partly lifted due to Easter effects on recreation and transport. A larger reversal effect is therefore expected in the May numbers”.

Goldman Sachs note that “the upside surprise in Canada’s April inflation print saw market cut pricing sharply reset, with the market pricing in only about 5bp for the June meeting”.

• Their economists expect “the BoC to look through the one-off price level increase due to tariffs - which they think played a role in the upside surprise - and continue to expect a cut at the June meeting (plus one more in July to a 2.25% terminal rate), though they acknowledge the risks of a hold have gone up”.
• Given market pricing implies only about 60% of a full cut by the July meeting, Goldman Sachs think “there is value to receiving the very front-end of the CAD curve with the softer activity picture continuing to point towards cuts” and recommend receiving July BoC meeting OIS.

Crude oil futures are little changed on the day, with the crude-supportive developments in the EU-U.S. trade talks, in addition to geopolitical risks in the form of the potential for a further intensification in the Israel-Hamas conflict and the latest Russian missile launches on Ukraine, neutralised by some ongoing fundamental headwinds.

• That leaves WTI & Brent futures little changed, with medium-term bearish technical themes intact despite the recent bounce.
• Bulls need to break the 50-day EMA’s in the contracts ($62.75 & $66.24, respectively), to turn the tide more in their favour.
• Meanwhile, the respective April 9 lows present key support and the technical bear triggers.
• Our commodity team notes that fundamental pressure remains evident amid general economic headwinds, coupled with expectations for a more meaningful OPEC+ production increase from July.
• BBG have warned that OPEC+’s seemingly hardline approach to punishing its overproducing members risks plunging crude into a full-blow price war.
• Elsewhere, some downward pressure seemingly came from U.S. President Trump noting that he was “optimistic” following the last round of talks with Iran on limiting their nuclear programme in exchange for sanctions relief.
• Also, note that the Trump administration is preparing to use a narrowly tailored license for Chevron to allow it to perform minimal maintenance of essential operations in Venezuela.