The market saw a rebound following the recent pause in the US-China trade conflict, but this optimism was countered by the release of the US April inflation data, which revealed some surprising results. While the trade war’s impact on the US and global economy seems less severe than initially feared, this has prompted a reevaluation of inflation expectations. Specifically, a combination of resilient economic data and persistently high inflation is likely to reinforce Federal Reserve Chairman Jerome Powell’s cautious stance toward monetary policy.
The US inflation report for April showed a modest increase of 0.2% month-over-month and a year-over-year rise of 2.3%, slightly below the expected 2.4%. The core inflation rate, which excludes volatile food and energy prices, also climbed 0.2% month-over-month, holding steady at 2.8% year-over-year, consistent with March’s data. A closer look at the report indicated that some prices, such as electricity, had risen temporarily, but this was offset by a decline in food prices and a mixed performance in service prices. Housing prices still showed a 0.3% increase from the previous month. Overall, the report did not offer conclusive guidance on the potential impact of future tariffs.
After the release of the data, there was a brief dip in US Treasury yields, but the decline was short-lived. President Trump seized the opportunity to call for an immediate rate cut from Federal Reserve Chairman Jerome Powell, but the market quickly recognized that this report was unlikely to provide sufficient grounds for a shift in policy anytime soon. The yield on US Treasury bonds showed little change following the report, with two-year and five-year yields dropping by a modest 1.0 basis point, while the 30-year bond yield remained unchanged.
In contrast, German government bond yields performed weaker than their US counterparts, rising between 2.3 basis points (for the two-year bond) and 4.5 basis points (for the 30-year bond), as markets speculated on the potential timing and scope of further interest rate cuts by the European Central Bank (ECB). While a rate cut in June is no longer an absolute certainty, ECB President François Villeroy has signaled the possibility of another rate reduction over the summer, leaving room for flexibility in timing.
Meanwhile, US equity markets remain relatively well-supported. The S&P 500 index gained 0.72%, and the Nasdaq outperformed the broader market, buoyed by deals made during President Trump’s Middle Eastern visit that provided support for US technology stocks. The combination of moderate inflation and the ongoing risk rally contributed to a pullback in the US dollar, with the dollar index retreating from 101.7 to approximately 101. The euro also made a recovery from its recent dip, bouncing back to 1.1185 against the dollar.
Despite UK employment data meeting expectations and steady wage growth in March, the pound’s recent bullish momentum against the euro has shown signs of weakening, with the EUR/GBP pair closing at 0.841.
Looking ahead, today’s economic data is expected to be sparse, with only a few speeches from Federal Reserve officials, including Governor Waller and Vice Chairman Jefferson, and ECB officials such as Nagel and Holzmann. The price movements from yesterday suggest that both US and European yields have found some support, and markets are focusing on the upcoming meeting between Ukrainian President Zelensky and Russian President Putin in Turkey, which could influence market sentiment.
Given the recent rebound in risk sentiment, technical consolidation is expected in the markets, though uncertainties remain about whether the recent dollar pullback has fully run its course. The US dollar may continue to experience a rebound in the near term, depending on the unfolding geopolitical situation and economic data.
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