Weekly focus – Powell in the spotlight

Fed governor Jerome Powell will be in the spotlight again the coming week with the upcoming FOCM meeting on Wednesday where rates are widely expected to stay on hold (market prices only 7% probability of a rate cut). That is likely to draw the ire of US President Donald Trump who repeated this week that "he should reduce interest rates". Importantly, Trump earlier stated he will not fire Powell, which was crucial for restoring calm in US bond markets where bond yields have declined 20bp lower since then. We agree with markets that Fed's policy rate will be on hold on Wednesday but look for a cut in June.

The US news flow was skewed to the downside when it came to activity this week, although not yet pointing to a severe slowdown. GDP for Q1 showed a negative print of -0.3% q/q annualised, but mainly due to a sharp increase in imports related to front loading ahead of tariffs. Domestic demand growth was still healthy. A string of labour market data (ADP employment, job openings and jobs plentiful index) showed softening (non-farm payrolls released after deadline) and consumer confidence slipped further. On a positive note, consumer spending was robust in March, partly lifted by some front loading ahead of tariffs, and the ISM manufacturing surprised to the upside. We do expect to see a weakening US economy in coming months, with payback from frontloading on consumption and rising pain from the de facto trade embargo between China and the US.

There is still no sign of US and China initiating trade talks as both sides are waiting for the other to take the first step. We expect this to happen quite soon, though, as Trump could otherwise be facing empty shelves and steep price increases before long and China also faces growing pain on exporters. We look for talks to start within the next 4-6 weeks and expect that tariffs will be lowered to around 60% at an early stage to get trade rolling again. The US says it is close to making deals with Asian countries such as South Korea, Japan and India. The first deals will be key to watch as they will give a sense of whether tariff rates will stay at the current 10% for most countries or be lifted to say 15-20%. Trump will need tariffs at a certain level to be able to fund tax cuts with tariff revenue.

In the euro area inflation data was a bit to the high side with a rise in core inflation from 2.4% to 2.7% y/y (consensus 2.5% y/y). It was lifted by higher service inflation related to Easter, though, so it should not be a too big concern. Looking ahead ECB's wage tracker points to a clear decline in wage growth and we also look for falling commodity prices and more Chinese overcapacity to drive goods inflation lower leaving room for more ECB cuts.

Stock markets saw further upside this week driven by positive earnings reports from big US tech companies and as the trade war is in de-escalation mode, at least for now. S&P500 has pretty much erased all losses since 'Liberation Day' on 2 April and the USD has recouped some of its losses. We still expect a bumpy road ahead, though, as the pain from the trade war shows up in the data. 

Apart from the FOMC meeting focus over the coming week will be on trade talks and the negotiations on the US budget bill. It is a very light calendar on the data side where we get Euro Sentix, German IP and factory orders and Japan labour earnings.

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