FOMC set to stay on hold as Powell nears end of tenure

In focus today

Tonight the FOMC is expected to keep its target rate unchanged within the current range of 3.5-3.75%. It is likely the last meeting with Jerome Powell as Fed chair, before Kevin Warsh is expected to replace him. For more details, read our Research US - Fed preview: In a waiting mode, 27 April.

We will receive German and Spain flash inflation numbers today, the most important releases ahead of the euro area print tomorrow. Furthermore, the EU Commission's business confidence indicator is released today where focus is on the selling price expectations. The forward-looking nature of the survey is important for the ECB.

In Sweden, we will receive preliminary GDP data and the NIER survey, which will provide crucial insights into the outcome for the first quarter. We expect 0% q/q growth and 2% y/y growth for the preliminary GDP figures. The quarterly NIER survey will also reveal firms' inflation expectations, which over time has proven to be one of the most reliable inflation indicators.

In the afternoon, the Bank of Canada is widely expected to keep its key policy rate unchanged at 2.25%, thus marking the fourth consecutive hold.

Overnight, China releases PMIs for April with both the private as well as official NBS data coming out. The numbers will give an indication of how the Chinese economy is coping with the war in the Middle East. As seen in the euro zone last week, manufacturing PMIs are expected to hold up at levels above 50 while the service sector could see a hit due to negative effects on transportation and a decline in tourism.

Economic and market news

What happened overnight

In Australia, the Reserve Bank of Australia's (RBA) preferred measure of core inflation, the trimmed mean measure, rose by 0.8% in Q1, slightly below market expectations and the 0.9% increase seen in Q4. RBA is expected to hike rates again next week, but it is not a done deal yet with around 70% probability priced in.

What happened yesterday

In oil markets, prices continued to climb slightly yesterday, with Brent crude rising to USD 111/bbl, returning to pre-ceasefire levels. Expectations for a swift reopening of the Strait of Hormuz have diminished significantly, with investors on Polymarket now assigning roughly a 40% probability of oil flows normalising before the end of May, down sharply from 70% immediately after the ceasefire. Markets are likely to remain sceptical about progress in US-Iran talks and may only react decisively once ships begin to cross the strait again.

Furthermore, the UAE's decision to leave OPEC and OPEC+ from 1 May marks a notable shift in the oil market. While the move allows the UAE to produce at full capacity independently, the news did not affect oil pricing due to the continued closing of the Strait of Hormuz. Reuters reports that the UAE, which accounted for 3% of global crude supply with a production of 3.4 million bbl/day before the Iran war, could ramp up output to its full capacity of 5 million bbl/day once shipping resumes. As OPEC's fourth-largest producer, the UAE's departure reduces the group's control over global oil production from 50% to approximately 45%. While Iraq has confirmed its commitment to OPEC+, the UAE's exit raises questions about the organisation's cohesion and signals a potential regime shift in the oil market. While such a shift could potentially drive a substantial drop in oil prices, this is contingent on the reopening of the Strait of Hormuz.

In the euro area, the ECB's Consumer Expectations Survey for March revealed sharply higher inflation expectations, with median 1Y CPI expectations jumping to 4.0% from 2.5%, and 3Y expectations rising to 3.0% from 2.5%. The monthly increase in 1Y expectations is nearly as large as the surge seen in March 2022, signalling a hawkish shift. Particularly medium-term expectations climbed, which prompted an upwards push on the EUR rates. Meanwhile, the ECB's quarterly bank lending survey showed banks tightening credit standards across all loan categories in Q1, driven by higher perceived risks. Further tightening is expected in Q2, which could help cool the euro area economy ahead of anticipated ECB rate hikes this summer.

In Japan, following the BoJ's decision to keep rates unchanged, Governor Ueda avoided firm guidance on the timing of a rate hike but kept the door open for potential action at the June meeting. Market pricing of hikes remained steady, with 17bp worth of hikes priced in by June and 50bp total rate hikes in 2026. We continue to expect a rate hike at the June meeting.

In the US, the April Conference Board consumer confidence index improved for the third consecutive month, in contrast to the less optimistic University of Michigan survey. In any case, overall confidence remains weak compared to pre-pandemic levels, and inflation expectations stay modestly elevated. ADP also released their weekly private sector jobs growth estimate, which showed that employment grew by 39k per week on average over the four weeks ending April 12, which is roughly consistent with the reference period for the upcoming April NFP. While the correlation to BLS's Jobs Report is far from perfect, ADP's weekly estimates have signalled improving sequential jobs growth into April. 

In Hungary, the central bank (MNB) left its benchmark rate unchanged at 6.25% yesterday, in line with both our expectations and market consensus.

Equities: Equities moved lower yesterday, with most regions in the red and the sector rotation tilting more defensive. What is worth noting, however, is that tech led the decline while the VIX actually fell. In other words, this was not primarily a classic negative macro-data sell-off. It was at least as much about renewed concerns around the AI space, triggered by OpenAI warning on revenue developments. That naturally brought one of the key underlying concerns in the AI narrative back to the surface: monetisation. But investors should be careful not to extrapolate too aggressively. What we have heard from OpenAI does not match what we have heard from Anthropic. Put differently, this may be less a story about broad-based AI demand disappointment and more about a meaningful shift in users from ChatGPT towards Claude.

Asian equities are mixed this morning, with Chinese equities stronger in Hong Kong. European and US futures are marginally higher.

FI and FX: EUR/USD continues to trade near 1.17 ahead of tonight's FOMC meeting where no change to the policy rate and no firm forward guidance is expected. The following press conference should be the last one for J. Powell as a Fed Chair. The BoC is to leave its policy rate unchanged at 2.25%, too, while focus will be on the quarterly MPR. The UAE's decision to leave OPEC might be a bearish trigger for oil prices once the SOH reopens, for now however oil remains at elevated levels with the June Brent Crude at USD111.2. In Sweden we will get important data from the NIER survey and the GDP Indicator for Q1. The Norwegian retail sales numbers are likely less of a mover of the NOK than potential surprises from the FOMC.