Central banks announce rates amid tariff uncertainty

In focus today

The Bank of England is expected to cut the Bank Rate to 4.25%. Inflation has surprised to the downside over the past months and combined with elevated uncertainty and downside risks to growth from the trade war, we expect the MPC to deliver slightly dovish commentary. Read more in our Bank of England Preview, 2 May.

Norges Bank is expected to stay on hold at 4.50%, We do not expect NB to give any clear signals as to whether the rate outlook has changed since March, when they signalled the first cut in September. Focus will be on how they have adjusted their risk assessment around the global trade war and if they will be more concerned with the growth risk. 

The Riksbank is expected to stay on hold, keeping the interest rate at 2.25% as they remain in a wait-and-see approach for now.

German industrial production and output is set for release this morning. We have already received GDP data that showed the economy climbed 0.2% q/q in Q1 and manufacturing PMI showed rising output, so the industrial production data should not lead to a market reaction. Consensus expects production to rise 1.0% m/m, but the data is likely to come in stronger than that, as data on factory orders released yesterday showed a larger-than-expected rise in March. 

Economic and market news

What happened overnight

In the trade war, New York Times reported President Trump is expected to announce a trade deal between the US and the UK today. Trump also hinted at this on social media.

What happened yesterday

In the trade war, China and US agreed to initiate negotiations to de-escalate the trade war, with talks set to begin in Switzerland over the weekend. The first discussion will aim to deescalate the situation and bring tariffs down to a level where trade can resume. We expect that soon they will bring down tariffs to 50-60%, although negotiations will be challenging due to differing negotiation styles. China has the greatest interest in standing firm in the negotiations in the short term as they can react quickly with new stimuli, unlike Trump, who cannot control monetary policy himself - and also being dependent on Congress to get tax cuts through.

In the US, the Fed maintained an unchanged monetary policy keeping rates between 4.25% and 4.50%. Fed Chair Powell expressed no hurry to cut rates. Powell seemed to be suggesting the Fed is not looking to move pre-emptively, even if tariffs would pose a recession risk. There was a clear emphasis on the Fed being in a good place for now, but when asked, Powell did not explicitly close the door for a cut in June. Read more in our Research US - Fed review: Still in a good place, 7 May.

In the euro area, retail sales declined 0.1% m/m in March as expected. Retail sales thus continued the stagnation seen over the past six months. On the one hand, it is negative that retail sales are not rising amid a strong labour market, rising real wages, and lower rates. Although on the other hand, it shows that consumers have not scaled back consumption on the back of the significantly lower consumer confidence observed lately.

In Sweden, preliminary inflation numbers for April came in with CPIF at 2.3% and CPIF ex energy at 3.1%. The data was close to both expectations and the Riksbank's forecasts and will keep the Riksbank in a wait-and-see mode.

In Poland, the central bank opted for a 50bp cut, taking the key rate to 5.25%. Barely a month ago, Governor Glapinski stated that there was no room for cuts until late 2025. We will have to await today's press briefing for comments on the matter.

In Czechia, the central bank lowered the two-week repo rate by 25bp to 3.5%.

Equities: Equities finished higher yesterday following some fluctuating trading, particularly during the US session, where markets oscillated between gains and losses. It is worth noting however, that intraday movements and volatility continue to decline, with the VIX also closing lower. Hence, investors are increasingly accepting the noise from the US trade war. Cyclical stocks marginally outperformed defensives, and small caps outperformed large caps for the fourth consecutive day. In the US yesterday, Dow +0.7%, S&P 500 +0.4%, Nasdaq +0.3%, Russell 2000 +0.3%.

This morning, most Asian markets are trading in positive territory, and both European and especially US equity futures are pointing higher following comments from Donald Trump, who suggested he may announce a major trade deal at a press conference today - potentially with the UK.

FI&FX: There was a decent rally in both European government bonds as well as US Treasuries, where the curves flattened from the long end. Hence, the comments from the Federal Reserve did not change much for the market as they are on hold as expected. The Federal Reserve points to higher inflation from taxes, but also slowing demand given the significant uncertainty. In the currency market the dollar strengthened modestly versus both EUR and the JPY. This morning, we have seen a modest rise in US treasury yield in Asian trading and modest moves in the USD vs. both EUR and JPY. Today, we have central bank meetings in UK, Sweden and Norway.