In the world of finance, today’s spotlight is firmly fixed on several central banks as they make crucial decisions that could shape the economic landscape. The Bank of England is expected to lower the Bank Rate to 4.25%. Over the past few months, inflation has taken a downward turn, catching many by surprise. Coupled with the elevated uncertainty and the downward risks to growth stemming from the trade war, the Monetary Policy Committee (MPC) is likely to issue commentary with a slightly dovish tone. Our in – depth Bank of England Preview on 2 May provides more insights into this anticipated move.
Norges Bank is set to maintain its interest rate at 4.50%. Given that they signalled the first potential cut in September during their March announcements, there’s little expectation of clear signals regarding changes in the rate outlook. All eyes will be on how they recalibrate their risk assessment in the face of the global trade war. Will they show greater concern for the growth risks? This will be a key aspect to watch.
The Riksbank, Sweden’s central bank, is also expected to hold steady, keeping the interest rate at 2.25%. Currently, they are adopting a wait – and – see approach, closely monitoring economic developments before making any moves.
In addition to these central bank decisions, economic data is also on the agenda. German industrial production and output figures are due for release this morning. Recent GDP data showed that the German economy climbed 0.2% quarter – on – quarter in Q1, and the manufacturing Purchasing Managers’ Index (PMI) indicated rising output. As such, the industrial production data is not likely to trigger a major market reaction. The consensus is that production will rise 1.0% month – on – month, but considering yesterday’s factory orders data, which showed a larger – than – expected increase in March, the actual figures may be even stronger.
Overnight and Yesterday’s Developments
Overnight, the New York Times reported that President Trump is expected to announce a trade deal between the US and the UK today. Trump himself hinted at this on social media, adding fuel to the speculation.
Yesterday, in a significant development in the trade war, China and the US agreed to initiate negotiations to de – escalate the situation. Talks are set to commence in Switzerland over the weekend. The primary goal of the first discussion is to ease tensions and bring tariffs down to a level that allows trade to resume. While negotiations are expected to be challenging due to the different negotiation styles of the two countries, it is anticipated that tariffs could soon be reduced to 50 – 60%. China, with its ability to quickly implement new stimuli, has a strong incentive to hold firm in the short – term negotiations. In contrast, President Trump faces limitations as he cannot directly control monetary policy and is dependent on Congress to pass tax cuts.
In the US, the Federal Reserve maintained its monetary policy unchanged, keeping rates between 4.25% and 4.50%. Fed Chair Powell expressed no haste in cutting rates, suggesting that the Fed is not looking to act pre – emptively, even with the potential recession risk posed by tariffs. However, when questioned, Powell did not completely rule out a rate cut in June. Our Research US – Fed review on 7 May provides more details on the Fed’s stance.
In the euro area, retail sales declined 0.1% month – on – month in March as expected, continuing the stagnation seen over the past six months. This is a concerning sign, considering the strong labour market, rising real wages, and lower interest rates. However, it also indicates that consumers have not significantly scaled back their consumption despite the recent drop in consumer confidence.
In Sweden, the preliminary inflation numbers for April showed the CPIF at 2.3% and CPIF ex – energy at 3.1%. The data was in line with both market expectations and the Riksbank’s forecasts, further justifying the bank’s wait – and – see approach.
In Poland, the central bank surprised the market with a 50 – basis – point cut, bringing the key rate down to 5.25%. This move is particularly notable as Governor Glapinski had stated barely a month ago that there was no room for cuts until late 2025. The market will be eagerly awaiting today’s press briefing for an explanation.
In Czechia, the central bank lowered the two – week repo rate by 25 basis points to 3.5%.
Equities, FI&FX Markets
Yesterday, equities finished higher after a day of fluctuating trading, especially during the US session when markets seesawed between gains and losses. Notably, intraday movements and volatility continued to decline, with the VIX closing lower as well. This indicates that investors are becoming more accustomed to the noise from the US trade war. Cyclical stocks slightly outperformed defensives, and small caps outperformed large caps for the fourth consecutive day. In the US, the Dow Jones Industrial Average rose by 0.7%, the S&P 500 increased by 0.4%, the Nasdaq advanced by 0.3%, and the Russell 2000 was up by 0.3%.
This morning, most Asian markets are trading in positive territory. European and especially US equity futures are also pointing higher, following comments from Donald Trump, who hinted at announcing a major trade deal at a press conference today, potentially with the UK.
In the fixed – income and foreign – exchange (FI&FX) markets, both European government bonds and US Treasuries rallied. The yield curves flattened from the long end. The Federal Reserve’s comments did not significantly alter the market sentiment as the Fed remained on hold as expected. The Fed pointed to higher inflation from taxes but also noted slowing demand due to significant uncertainty. In the currency market, the US dollar strengthened modestly against both the euro and the Japanese yen. This morning, US Treasury yields have seen a modest rise in Asian trading, and there have been modest moves in the US dollar against the euro and the yen. With central bank meetings in the UK, Sweden, and Norway today, the markets are bracing for potential shifts in monetary policy stances and subsequent impacts on the FI&FX markets.
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