Economics Weekly: Europe and Japan’s Hike on the Cards
G3: Still muddling through? As we move into Jun 2026, optimism around a "muddle-through" peace deal in the Middle East remains elusive, while the macroeconomic landscape braces for a highly anticipat...
Chief Investment Office - Hong Kong5 Jun 2026
  • G3: As the Fed navigates its internal transition, the ECB and BOJ are expected to hike rates at their upcoming June meetings; with the Middle East situation still in limbo, focus shifts to labour market data due this Friday
  • Eurozone: May inflation rose to 3.2% y/y, above the official target, with an uptick in core readings; we expect a 25 bps rate hike at the June meeting, with policy guidance to stay cautious and hawkish
  • Japan: BOJ has issued clear signals pointing toward a potential rate hike at its upcoming June meeting; we bring forward our long-held 25 bps rate hike call from July to June
  • South Korea: BOK turned hawkish at its May meeting, with accelerating May CPI supporting this shift. We maintain our forecast for a 25 bps hike in 3Q26, as early as the July meeting, with another potential 25 bps hike in 4Q26
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G3: Still muddling through? As we move into Jun 2026, optimism around a "muddle-through" peace deal in the Middle East remains elusive, while the macroeconomic landscape braces for a highly anticipated Fed transition. Focus is on the 16-17 Jun FOMC meeting, Kevin Warsh’s debut as Fed Chair, as he walks a tactical tightrope. On one hand, President Trump has made his preference for lower interest rates unmistakably clear. On the other, April's CPI inflation print ticked up to 3.8% y/y (with whisper numbers pointing toward a breach of 4% if energy pressures persist). As the Fed navigates its internal transition, other major central banks are facing their own tactical dilemmas. June has become a month of hawkish recalibration amid the lingering Middle East conflict, which has kept global energy costs elevated. The European Central Bank (ECB) is expected to deliver an insurance hike to counteract inflation driven by energy shocks. Look for the deposit facility rate to increase by 25 bps to 2.25% at its 11 Jun meeting, alongside an upward revision to its inflation outlook. In Japan, we now expect the Bank of Japan (BOJ) to hike interest rates by 25 bps to 1% at its June meeting, brought forward from July.

With the situation in the Middle East still in limbo, focus shifts to this week’s labour market data. Jobless claims (initial and continuing) have remained low in recent weeks, pointing to continued resilience in the US economy. JOLTS job openings rose to 7.6mn (consensus: 6.9mn). It is therefore unsurprising that consensus is keeping an upbeat view on the official data due on Friday: nonfarm payroll is expected to come in at 85k (marking a third consecutive positive print), while the unemployment rate is projected to hold steady at 4.3%.

Concurrently, the Office of the US Trade Representative (USTR) unveiled a new legal pathway to reinstate country-specific tariffs. Following legal setbacks — including a Supreme Court ruling against broad IEEPA tariffs in February and a Court of International Trade decision striking down Section 122 tariffs last month — the Trump administration has shifted to Section 301 of the Trade Act of 1974 as its latest trade enforcement tool. The USTR identified 60 trading partners for allegedly failing to adequately restrict goods produced through forced labour. The proposal would impose an additional 10% tariff on 16 economies, including the EU, UK, Canada, Mexico, and Taiwan, for inadequate enforcement of existing bans, and a further 12.5% on 44 economies, including China, Japan, South Korea, India, Australia, and Singapore. Markets initially saw this as an escalation in trade tensions. However, the proposal must still complete the Section 301 process, with public comments due by 6 Jul, and hearings to start on 7 Jul. The administration appears to be fast-tracking the timeline so new tariffs can take effect before the temporary Section 122 tariffs expire on 24 Jul.


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