Merz overcomes initial setback to become Germany's chancellor

In focus today

This evening the Federal Reserve May meeting takes place, where we expect the Fed to keep an unchanged monetary policy, in line with consensus and market pricing. While we expect the Fed to resume cutting rates in June, we doubt Powell will opt for clear forward guidance amid the tariff uncertainty. Read more in our Research US - Fed preview: Waiting calmly before the storm, 5 May.

In the euro area, we look out for March retail sales data, which could reveal if the weaker consumer confidence recorded in the previous months have started to affect spending. So far, retail sales have been flat in the past six months, following a strong rise in the first half of 2024. 

This morning in Sweden, we receive preliminary inflation numbers for April. We expect CPIF at 2.5% y/y and CPIF ex energy at 3.2%, close to the Riksbank's forecast at 2.3% y/y and 3.2%, respectively. No details will be provided until next week. This is the last piece of information for the Riksbank ahead of today's policy decision, due for announcement tomorrow.

Economic and market news

What happened overnight

In China, the central bank announced a series of measures to further ease monetary policy. This includes cutting the reserve requirement ratio, lowering key policy rates and interest rates for specific sectors and a new re-lending facility to support the service sector. The recent appreciation of the yuan has made more room for easing monetary policy. China has generally been reluctant to ease when there is weakening pressure on its currency. This stimulus should help a little on domestic demand in the light of the trade war with the US.

In South Asia, India carried out two air strikes on Pakistan following last month's militant attacks on tourists in the Indian-administered Kashmir region. India's defense ministry said it had targeted terrorist infrastructure, non-escalatory in nature. In an initial response, Pakistan Prime Minister Shehbaz Sharis deemed the strikes an act of war giving Pakistan every right to respond forcefully.

What happened yesterday

In Germany, chancellor Merz managed to secure 325 votes in the Bundestag to become chancellor. The vote was the second of the day, following a first vote where he failed to secure backing with only 310 of the required 316 votes. His coalition has 328 members, which shows that the members not voting for him wanted to teach him a lesson rather than sink his political career. He has probably realised that there is disagreement in the coalition and that he cannot steamroll his own decisions through. Hence, new reforms and policies will likely take more time to negotiate than previously thought, given the disagreement that is now visible. But still, the infrastructure fund and change to the debt brake have already been passed and the coalition have that money to spend. 

In the euro area, the final composite PMI for April was revised up to 50.4 from 50.1 in the flash estimate. Hence, the economy experienced a small expansion in April according to the indicator. The higher final data was due to both sectors in the survey, as manufacturing PMI was revised up to 49.0 from 48.7 and services up to 50.1 to from 49.7. While manufacturing did not turn out as bad as feared given the recent trade uncertainty, the services PMI dropping from 51.0 in March is more worrying.

In Sweden, the services PMI for April declined to 48.4 and was marginally revised down for March to 49.3 from 49.4. The decline what somewhat unexpected due to recent NIER survey for the services sector remaining somewhat unchanged at 98.0 in April from 97.7 in March.

In Norway, seasonally adjusted housing prices declined 0.2 % m/m in April, confirming the signals of a somewhat weaker market the last couple of months. Details were slightly mixed, as the inventory to sales ratio dropped from 2.5 to 2.4, mainly driven by higher transactions, while the inventory of unsold houses rose further. This is the second month where the housing inflation is significantly below Norges Bank's estimate from the latest MPR (March: 0.1 % vs. exp. 0.7 % and April: -0.2 % vs. exp. 0.6 %). However, this is still more of a cooling down than outright weakness and should not affect monetary policy going forward. 

Equities: Global equity markets continued their downward drift yesterday, though once again without a clear catalyst from either macroeconomic data or corporate earnings. The decline came despite a mixture of solid macroeconomic indicators and decent corporate results. Notably, cyclicals outperformed again, and European equities continued to show relative strength compared to US markets. Volatility ticked up slightly, with the VIX edging higher, but the broader trend suggests a market that is gradually settling down. Daily swings are narrowing, and intraday volatility has decreased, signalling a more stable equity environment. In the US yesterday, the Dow fell by 1.0%, the S&P 500 by 0.8%, the Nasdaq by 0.9%, and the Russell 2000 by 1.1%. Trade headlines are once again dominating sentiment this morning. Markets are digesting confirmation that US and Chinese officials will meet in Switzerland over the weekend for talks. Asian markets are trading higher, and futures in both Europe and the US point slightly upwards.

FI&FX:  US Treasury yields declined after strong 10Y Treasury auction. Today we have the 30Y auction and the market will be looking for a similar demand at the auction. The euro strengthened versus the USD despite the political volatility in Germany. The main focus today is the FOMC meeting, where we expect that the Federal Reserve is on hold.