Euro area consumer confidence due today

In focus today

In the euro area, we will receive consumer confidence data for May, which will show how consumers have reacted to the improvements in trade talks between the US and China and following risk on sentiment in markets.

In Denmark, the government releases a new economic forecast, which according to media reports will show 3.0% GDP growth in 2025, which would imply quite weak q/q growth during the year. We also receive consumer confidence and flash Q1 GDP figures are being released. We anticipate a 0.5% q/q decline in GDP for Q1, following strong growth in 2024. However, there's high uncertainty due to unreliable real indicators for GDP growth, measured from the production side. While industrial production appears to have sharply decreased, the survey data may not accurately reflect current industry conditions.

Economic and market news

What happened overnight

China's central bank cut the 1-year and 5-year Loan Prime Rates by 10bp to 3.0% and 3.5% respectively, following the reverse repo rate which was lowered by 10bp on 6 May. These anticipated rate cuts aim to stimulate consumption and loan growth as the economy softens.  

In Australia, the RBA cut it cash rate by 25bp to 3.85%, as expected, marking the second rate cut this year. This decision follows the return of underlying inflation back inside the RBA's target band.

What happened yesterday

Ukraine-Russia peace talks, following Trump's call with Putin, Trump stated that Russia and Ukraine would commence immediate negotiations aimed at achieving a ceasefire and ending the war, though the Kremlin cautioned the process would require time. Trump briefed Zelenskiy and EU leaders in a group call. European leaders agreed to intensify sanctions on Russia, while Trump opted not to introduce fresh sanctions.

In the euro area, the European Commission released its updated economic projections. It forecasts real GDP growth to be 0.9% y/y in 2025, down from November's estimate of 1.3% y/y. This revision is primarily due to increased tariffs and uncertainty stemming from recent changes in US trade policy. Next year, growth is expected to improve to 1.4% y/y. Inflation is projected at 2.1% y/y for 2025 and 1.7% in 2026. The 2026 inflation forecast has been reduced from 1.9% y/y aligning with ECB's December projections. This adjustment suggests the ECB might also lower its March forecast of 1.9% when the June projections are released, indicating a dovish stance given the similarity in their modelling frameworks.

Equities: Global equities ended higher yesterday, in what turned out to be a notable turnaround session. Early in the day, risk sentiment was soft, and we saw broad-based selling, particularly in US-linked assets. However, as the session progressed, sentiment reversed, and markets closed close to flat or slightly positive. This marked yet another day of gains in equities, continuing the positive streak we've seen over the past month. The S&P 500 is now nearly 20% above its recent lows just over a month ago. VIX ticked up slightly, while defensives outperformed cyclicals once again.

However, it is worth noting that this outperformance is happening in an up-market and comes on the heels of a strong month for cyclicals leading to P/E premium being back close to 30% again in cyclicals. In the past three sessions have seen consistent relative strength in defensives, but overall volatility remains anchored near historical norms, which is remarkable given the current level of political uncertainty. This likely reflects the resilience of the macro backdrop, which remains relatively strong. In the US yesterday Dow +0.32%, S&P 500 +0.09%, Nasdaq +0.02%, Russell 2000 (0.42%). Asian markets are mostly higher this morning after China cut rates, and there is some catch-up after yesterday's gains in Western markets. US equity futures are pointing slightly lower, while European futures are trading in positive territory.

FI&FX: This morning, we have made a slight change to our Fed forecast, now calling for the next 25bp cut in September (prev. June) but still maintaining our terminal rate view at 3-3.25%. As we pencil in quarterly rate cuts, the terminal rate will now be reached in September 2026. Market sentiment improved yesterday afternoon as the headwinds to US assets faded, and equities closed marginally in the green and 10y UST fell back almost to the same levels as before Moody's announcement on Friday. The USD remains on the backfoot however, with EURUSD lifting above 1.12 yesterday and our revised Fed call does not alter our EUR/USD outlook. We remain bearish USD and reiterate our 12M EUR/USD target of 1.20. We think the paid case in Norway has run a little too far relative to peers. Consequently, we yesterday booked profit on 3 of our short-end payer trades.