Key Focus
Today, the Bank of England (BoE) is expected to cut interest rates to 4.25%. Recent unexpected drops in inflation, combined with the increasing uncertainty surrounding trade wars and the economic risks posed by slower growth, lead us to predict that the Monetary Policy Committee (MPC) will adopt a slightly dovish tone.
The Norwegian central bank is expected to maintain interest rates at 4.50%. We do not anticipate any clear guidance on rate changes since the first rate cut signal was issued in March. The market will focus on how the Norges Bank adjusts its risk assessment on global trade wars and if it shifts focus towards growth risks.
The Swedish central bank is expected to keep rates unchanged at 2.25%, as it continues to adopt a wait-and-see approach.
Germany’s Industrial Production Data
German industrial production and output data will be released this morning. The GDP data we’ve received shows a modest 0.2% quarterly growth in Q1, and manufacturing PMI indicates a rise in output. Therefore, industrial production data is unlikely to provoke much market reaction. A growth of 1.0% in industrial production is widely expected, but the actual data may come in stronger than anticipated, given the better-than-expected factory orders from March.
Economic and Market News
Overnight Developments
On trade, The New York Times reports that President Trump is expected to announce a US-UK trade agreement today, and Trump has also hinted at this on social media.
Yesterday’s Developments
In trade, China and the US have agreed to begin talks to ease the trade war, with negotiations set to start this weekend in Switzerland. The first round of talks is aimed at de-escalating tensions and reducing tariffs to a level that allows trade to resume. We expect both sides to reduce tariffs by 50%-60%, but negotiations will be challenging due to differing negotiation styles. China is particularly keen on maintaining its negotiating position in the short term, as it can implement new stimulus measures quickly, unlike President Trump, who has less control over monetary policy and tax cuts, which are dependent on Congress.
In the US, the Federal Reserve kept rates unchanged between 4.25% and 4.50%. Fed Chairman Jerome Powell indicated there’s no rush to cut rates, even with the potential risks of a recession from tariffs. Powell made it clear that the Fed is in a solid position, but when asked about future rate cuts, he didn’t rule out a rate reduction in June.
Eurozone Economic Data
Eurozone retail sales fell by 0.1% month-on-month in March, in line with expectations. Retail sales have remained stagnant for the past six months. Despite a strong labor market, rising real wages, and lower interest rates, retail sales have not seen any significant growth, raising concerns. However, it also shows that consumers have not sharply reduced their spending despite a notable decline in consumer confidence.
Swedish Inflation Data
Sweden’s preliminary inflation for April showed a CPIF inflation rate of 2.3%, with the CPI excluding energy at 3.1%. This data is close to expectations and in line with the Swedish central bank’s forecast, suggesting they will maintain a wait-and-see stance.
Polish Central Bank Rate Cut
The Polish central bank cut its benchmark rate by 50 basis points to 5.25%. Just a month ago, the governor, Adam Glapiński, stated there would be no rate cuts until the end of 2025. We will await today’s press conference for further commentary on this decision.
Czech Central Bank Rate Cut
The Czech central bank reduced the two-week repo rate by 25 basis points to 3.5%.
Stock Market Performance
US stocks ended higher after a volatile trading day, especially during the US session, with markets fluctuating between gains and losses. Notably, intraday volatility and the VIX index dropped, suggesting that investors are becoming more comfortable with the noise from the US-China trade war. Cyclical stocks slightly outperformed defensive stocks, and small-cap stocks outpaced large-cap stocks for the fourth consecutive day. Yesterday, US stock indices rose: the Dow Jones increased by 0.7%, the S&P 500 gained 0.4%, the Nasdaq rose 0.3%, and the Russell 2000 climbed 0.3%.
Asia-Pacific Markets
This morning, most Asian markets are in positive territory. After comments from President Donald Trump, stock futures in Europe and particularly in the US rose. Trump indicated that a major trade agreement, possibly with the UK, could be announced during his press conference later today.
Fixed Income & FX Markets
There was a notable rally in both European government bonds and US Treasuries, with the yield curve flattening from the long end. Federal Reserve comments did not bring much change, as the Fed remains on hold, as expected. While the Fed mentioned higher inflation due to taxes, it also noted slowing demand amidst significant uncertainty. The dollar strengthened modestly against both the EUR and the JPY. In early Asian trading, US Treasury yields saw a modest rise, and the USD showed modest moves against both the EUR and JPY. Today, central bank meetings in the UK, Sweden, and Norway will be in focus.
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