Will US Retail Sales show consumers retreating?

In focus today and over the holidays

Today the US March retail sales and industrial production data is due for release in the afternoon. Markets will pay extremely close attention to especially retail sales, which provides hard evidence of how consumer behaviour has evolved after Trump's tariffs began to take effect. Keep in mind that the data has been collected before the 'Liberation Day' announcements. In the evening, the Fed chair Powell is scheduled to speak at the Economic Club of Chicago at 19.30CET. 

From the euro area, we receive the final March inflation data. We expect the data to confirm the flash release, leading to no market reaction as focus has shifted from inflation towards growth concerns and the trade war.

UK CPI is also being released bringing in inflation data for March. Consensus expects a drop in both headline to 2.7% y/y from 2.8% y/y, core to 3.4% y/y from 3.5% y/y and service inflation to 4.8% y/y from 5.0% y/y. If consensus estimates hold, the Bank of England should stay on track to ease monetary policy at its next meeting in May.

The Bank of Canada meeting takes place today at 15:45 CEST. Markets and consensus are leaning towards an unchanged rate decision, with markets pricing in approximately 9bp of cuts. We project that the BoC will deliver a 25bp rate cut, bringing the policy rate to 2.50%. Tariff uncertainty remains elevated and is slowly passing through to soft data, as evidenced, by the relatively downbeat Q1 Canadian business and consumer sentiment reports - supporting the case for a rate cut.

On Thursday, all eyes are on the ECB meeting, where we expect the ECB to cut the policy rate by 25bp to 2.25%, in line with market pricing and consensus. We expect the statement to repeat "monetary policy is becoming meaningfully less restrictive" and Lagarde to highlight the downside risks to growth from the trade war while abstaining from giving any clear guidance on future rate decisions. We expect Lagarde to communicate that the ECB is ready to use all instruments if financial market turmoil increases but currently do not see signs of markets not working in orderly fashion. Going forward, we expect the ECB to deliver three 25bp cuts at the upcoming meetings, bringing the deposit rate to 1.50% by September 2025.

Economic and market news

What happened overnight

In China, quarterly GDP data printed at a very strong level of 5.4% y/y over consensus expectations of 5.1% y/y. Both industrial output at 7.7% y/y and retail sales at 5.9% y/y also significantly exceeded expectations showing significant increases in domestic consumption. However, we are now in Q2 and looking ahead Chinese growth is bound to take a big hit from the massive increase in US tariffs, which is set to lead to a nosedive in exports and also GDP.

What happened yesterday

In the euro area, the ECB Bank Lending Survey pointed to continued stabilising lending conditions following gradual improvements over the past years and balance is to the dovish side. Banks noted an additional tightening of credit standards for companies while also noting a more muted demand for loans. Likewise, risk perceptions and credit quality deterioration continues to weigh on lending to firms and consumers. Credit growth remains muted and combined with the negative impact from the trade war, this should keep ECB on track to deliver further easing. Please note the survey was conducted before Liberation Day.

In Germany, optimism about the economy has waned amid trade war uncertainties. The ZEW Economic Sentiment Index fell sharply to -14.0 in April from 51.6 in March, marking the lowest since summer 2023. Despite a slight improvement in current economic conditions, they remain low at -81.2 (cons: -86.8). Trade tensions, especially with the US and China, significantly impact Germany, with the automotive industry facing a 25% tariff in the US.

In the UK, the labour market report for February/March was fairly in line with expectations with a slight tilt to the soft side. Unemployment rate remains unchanged at 4.4% as expected. Wage growth excluding bonuses was lower than expected at 5.9% for both the whole economy and the private sector with downward revisions for the previous month. Payrolls for March dropped by 78k, with a downward revision of 8k for February. This should keep the BoE set to deliver its next cut in May in line with our expectations.

In Sweden, the spring budget bill was an expected non-event, as most of its contents had already been pre-announced. The additional spending of SEK 11.5 billion is about 0.2% of GDP, but it should be added to the SEK 60 billion announced in September last year for 2025. The new proposals in the spring budget (announced back in March) centre around an extended tax cut for home renovations, which is rather narrow in terms of target group. The spring bill also comes in the context of increased defence spending, which will be formalised for the upcoming autumn bill and will, in our view, result in an upward revision of the borrowing requirement when the Debt Office presents a new borrowing forecast in May.

Equities: Global equities edged slightly higher yesterday, although the real headline was Europe outperforming the U.S. by over 1 percentage point. European markets closed broadly higher, while most major U.S. indices ended the day flat or marginally down. Cyclicals slightly outperformed defensives, and the VIX remains elevated around 30.

In the U.S. yesterday, the Dow declined by 0.4%, the S&P 500 by 0.2%, the Nasdaq by 0.1%, and the Russell 2000 rose by 0.1%.

This morning, Asian markets are trading lower, led by a sharp 2.5% drop in Hong Kong. This comes despite stronger-than-expected Chinese macro data, as industrial production, retail sales, and GDP all surpassed forecasts, with GDP coming in at 5.4% year-on-year.

Futures in both the U.S. and Europe are pointing lower this morning. U.S. tech futures are under particular pressure after Nvidia warned of a $5.5 billion write-down this quarter, citing repercussions from the ongoing trade war.

FI&FX: In an otherwise relatively quiet week so far, EUR/USD slipped below 1.13 as the broad USD paused its five-day slide and Treasury bonds climbed, after Treasury Secretary Scott Bessent downplayed the recent sell-off. Risk-on sentiment in markets provided support for European yields during yesterday's session, leading to a bearish steepening of the German curve. Positive market sentiment and equities tracking higher further supported GBP FX ahead of the release of UK CPI this morning.