We now expect two rate cuts from the Fed this year

In focus today

Today is a quiet day on the data front. In the euro area, focus is on March retail sales and German factory orders. Consumers are still cautious with spending amid low unemployment and rising real incomes so we expect muted spending.

We revise our Fed call to 2 rate cuts of 25bp this year in September and December. It will be a close call between July and September but with macro indicators showing no signs of sudden weakening, we lean towards September as our base case. 

Economic and market news

What happened overnight

Mixed signals from the Israel-Hamas war, as yesterday afternoon first brought reports of explosions in Rafah, the southernmost area of the Gaza strip, and that the IDF were evacuating residents in the area which indicated that Israel could be preparing for an attack on the area which houses 2.3 million refugees. In the evening, Hamas then announced it had accepted a ceasefire deal from Egyptian/Qatari mediators to which Israeli officials responded that no such deal had been reached, according to Reuters. As of this morning it is clear Israel has not agreed to a ceasefire, but says it is sending a delegation to negotiate with mediators while continuing operations in Rafah which is yet to turn into a major operation. 

This morning the Reserve Bank of Australia kept its cash rate fixed at 4.35% as widely expected. Markets have pushed back their rate cut expectations significantly recently after the clear upside surprise in Q1 inflation data.

Markets seemed to continue to challenge the Japanese authorities' fortitude after last week's suspected intervention which brought USD/JPY to 152.98 (-3.1%) on Friday, as the cross gained 0.6% during the day and climbed further past 154 overnight, up some 0.5% as of this morning, after top currency official Kanda said there was no need to intervene if "the market is functioning properly". The dovish signals from the US have supported the yen, but authorities continue to be in a bind as there are still signs of substantial rate differentials in the near-term, which complicates any persistent effects of an intervention.

What happened yesterday

In the US, both Richmond Fed President Barkin and NY Fed President Williams on separate occasions said the current rate target was appropriate indicating we are not in for hikes any time soon, with Williams stating that "eventually we'll have rate cuts". This echoes last week's FOMC meeting and overall market sentiment, which currently has 2 cuts priced in for the year.

Three ECB policymakers said the ECB was more confident about cutting rates, with both Phillip Lane, Boris Vujcic and Gediminas Simkus saying they were confident that inflation was enroute to target. The April PPI gave the same signals as the print showed a 0.4% m/m decline and thus continued to hover around the -8% y/y as it has for the past half year. This indicates no pressure on goods prices from producer prices meaning we should expect core goods inflation to remain subdued in the near term.

Market movements

Equities: Global equities saw an increase yesterday in a session devoid of major news, making it a relatively quiet session. It is not necessarily disadvantageous when the absence of news is perceived as good news. In other words, the news received during the previous busy weeks may have a positive influence on subsequent weeks, giving investors time to digest and reconsider the cumulative past data. Yesterday's risk-on session was dominated by small-caps, cyclicals, high-beta, and long momentum, while value and minimum volatility lagged. In the US, the Dow increased by 0.5%, S&P 500 by 1.0%, Nasdaq by 1.2%, and Russell 2000 by 1.2%. Asian equity markets continued to rise this morning, led by South Korea with a 2.4% increase and markedly higher in Japan despite the USDYEN at 154. European futures higher this morning, while US futures are more mixed.

FI: The UK bank holiday left a solid mark on European rates markets resulting in very limited volumes and volatility. Some initial catch up to the US treasury trading on Friday sent yields marginally lower from the start, yet after grinding higher through the day, the 10y German Bund yield ended 2bp lower on the day in what can be characterised as a bull flattening move. There was no significant market news.

FX: We were off to a quiet start to the week with UK markets out due to Spring Bank Holiday yesterday. EUR/USD stabilized around the mid 1.07 mark while NOK gained modestly. EUR/CHF edged higher still recovering from last wee'’s topside inflation surprise. For the SEK, the Riksbank meeting tomorrow is in focus where we see the potential for a move higher on the back of our expectation of an unchanged decision. More broadly however, the Scandies continue to be closely tied to movements in USD rates, where we see the balance of risk for lower rates and hence potential for temporary Scandi strength.