Market Sentiment Driven Mainly By Yesterday's Strong U.S. Data

We expect that German inflation remained subdued in May. Core inflation is running at a very low level and commodity prices are held in check by positive supply side factors and fading Chinese demand.

The euro area M3 release for April will give insight into the credit growth situation in the euro area - tight credit is a key factor which is currently restraining growth. In addition, German unemployment is expected to remain unchanged in May.

In terms of central banks, Fed dove Rosengren (voter) will speak on the economic outlook this evening. Earlier in the day we will get the Bank of Canada interest rate decision.

In Sweden all eyes will be on the Q1 GDP numbers. We will look for some weak numbers, well below the Riksbank and consensus forecasts.

Selected market news

Market sentiment was driven mainly by yesterday's strong U.S. data. The U.S. Conference board's consumer confidence was much stronger than expected as it reached the highest level since the recession ended, fuelled by a strong improvement in both the assessment and expectations of the present situation. Our trend model for employment growth now points to a gain of 190K in May. If growth picks up in Q3 as we expect, this leaves the U.S. on track for a September start of QE tapering. The Case-Shiller house price index showed that the recovery in the housing market has gained substantial strength with house prices up 10.9% in a year. The stronger-than-expected U.S. data have caused fixed income markets to look more fragile, with both the Bund and the U.S. treasury market testing the upper part of their recent interest rate ranges. U.S. stock markets focused on the prospect of stronger-than-expected growth and rallied further. In FX markets, the EUR/USD reacted immediately to the strong confidence data and fell yesterday, while it was broadly stable overnight.

The IMF early this morning lowered its forecast for China's GDP growth to 7.75% both this year and next (from 8% this year and 8.2% next year) adding that 'rapid growth in financing raises questions over the quality of investments and the repayment ability of companies and local governments'. This has caused a decline in the Hang Seng index. Apart from that, the Asian session has been more upbeat, although the Japanese stock market continues to struggle to find direction.

In Europe ECB's Noyer said yesterday that he is 'unconvinced of the need for negative rates' and that 'there have been experiences in the past ... not all are convincing. In some cases it even tended to trigger an increase in the rates of credit because the banks were compensating for a loss they were getting on their deposits with the central bank'. We do not expect the ECB to cut the deposit rate to negative territory.

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