Anticipation is building for Powell's outlook on US economy

In focus today

The main event will be the FOMC meeting tonight. We expect an unchanged rate decision which is also fully priced in the markets, but all eyes will be on Powell's communication about the outlook for further rate cuts as well as the updated rate and economic projections. The Fed could also provide signals about further tapering or even completely ending QT over coming months.

Economic and market news

What happened overnight

In Japan, the Bank of Japan concluded its two-day policy meeting, keeping the policy rate at 0.5% as expected. They highlighted that exchange rate developments are, compared to the past, more likely to affect prices. The market reaction to the decision was muted. With the outlook for another significant wage bump this year, we anticipate the BoJ will find room to hike rates again in July. We will keep an eye on the 07.30 CET press conference to look for clues on the future rate path.

What happened yesterday

In Ukraine, Russian President Putin agreed to a 30-day halt to strikes against energy infrastructure in Ukraine following talks with President Trump. While President Putin did not agree to the full 30-day ceasefire proposal like Ukraine, the US and Russia have agreed to work quickly towards more extensive peace agreements. Further discussions are set to take place in Saudi-Arabia on Sunday between the US and Russia.

In Germany, the new German government has successfully passed the significant fiscal package through the Bundestag, with support from The Green party. The package is expected to pass the Bundesrat on Friday, backed by a two-thirds majority between the CDU/CSU, SPD, Greens, and Bavarian Free Voters. The ECB anticipates upside risks to inflation and growth from this package, supporting a slower pace of rate cuts. While Germany will experience a positive demand shock, we expect the bulk of growth impacts to occur from 2026 onwards, with GDP growth potentially rising by 1-2 percentage points in 2027. Germany's shift towards fiscal spending may influence EU-level agreements on increased defence spending and common borrowing, although growth impacts depend on rising production capacities in Europe.

Equities: Global equities were lower yesterday, primarily due to the US pulling global indices down with its significant weight in global indices. In Europe, the belief that Germany would pass the historic spending package in the Bundestag grew throughout the day, leading to indices ending higher, buoyed by Germany, manufacturing-related cyclicals, and notably banks. Consequently, Europe, not just Germany, is now outperforming the US by more than 15% year-to-date in local currency, and by more than 20% when measured in common currency. In the US, we once again saw Mag 7 and cyclicals under pressure. Banks, on the other hand, had a better day, finishing as the best-performing industry in the S&P 500. Yesterday in the US, Dow -0.6%, S&P 500 -1.1%, Nasdaq -1.7%, and Russell 2000 -0.9%. This morning presents a mixed bag in Asia, and the same could be said about Western futures. To be clear, calmness, days with sub-1% moves, and fewer noisy political headlines would be beneficial for equities at the moment.

FI&FX: EUR/USD rose to a new high yesterday following the passing of the German fiscal package in the Bundestag and progress on Russia-Ukraine ceasefire. The Bund ASW spread was about unchanged on the news. In Scandies, EUR/SEK fell back below 11.00, which also sent NOK/SEK lower again. The NOK curve steepened considerably driven by a decline in the short end.