BoJ holds policy rate steady at 0.75%, but with a hawkish vote split

In focus today

• In the euro area, the ECB's consumer expectations survey is released where focus will be on the 1-year and 3-year CPI expectations. The ECB's quarterly bank lending survey is also released which will give insights into financing conditions and the outlook.
• In the US, Conference Board will release its April consumer confidence survey. Earlier, University of Michigan's April survey pointed towards weakening sentiment and higher inflation expectations. ADP will also release its weekly private sector employment growth estimate.
• In Hungary, the central bank of Hungary (MNB) is expected to keep its policy rate unchanged at 6.25% when it announces its decision this afternoon.
• Overnight, Australia's Q1 inflation data is expected to show underlying trimmed-mean inflation steady at +0.9% Q/Q.

Economic and market news

What happened overnight

As widely expected, the Bank of Japan is on hold this morning keeping the overnight call rate at 0.75%. The decision was taken with a 6-3 vote, a closer call than both at the March and January meetings when only Takata Hajime voted for a hike, supporting our expectation for a June hike. The new outlook report suggests that the energy crunch affects inflation more than activity with a 0.5pp revision to GDP growth in the fiscal year (FY) 2026 and only 0.1pp in FY2027 while inflation excluding fresh food and energy has been revised 0.4pp/0.5pp higher respectively. The board members' forecasts also indicate that they are more worried about faster inflation than the risk on activity. The market has reacted with a stronger JPY and JGB yields edging higher. Next up is the press conference where investors will look for further guidance towards a summer hike, currently priced in at about a 54% likelihood by markets.

What happened yesterday

In the Middle East, mediators are working to bridge gaps between the US and Iran despite the cancellation of face-to-face talks by President Trump over the weekend. Iran's latest proposal calls for phased negotiations, prioritising an end to the war and lifting the US blockade before addressing nuclear issues, a proposal that Trump has criticised. Iranian Foreign Minister Abbas Araqchi has visited Pakistan, Oman, and most recently Russia in pursuit of support. Oil prices rose slightly in Monday's trade to USD 109/bbl as markets seem anxious about the risk of renewed escalation of the conflict and/or failure to start talks on a deal to re-open the Strait of Hormuz.

In the euro area, the ECB released its quarterly Survey on the Access to Finance of Enterprises (SAFE) for Q1. Firms expect selling prices to rise by 3.5% (up from 2.9%) and input costs, including energy, to increase by 5.8% (up from 3.6%), while wage expectations moderated slightly to 2.8% (down from 3.1%). The survey partially reflects the impact of the war in Iran, with later responses indicating increased price pressures. The European Commission's business survey on seller price expectations, due on Wednesday, will provide further insights into inflation dynamics.

In tech, OpenAI has ended its exclusive partnership with Microsoft, paving the way for deals with Amazon and Google. While Microsoft will remain OpenAI's primary cloud partner and retain a licence to its intellectual property through 2032, the removal of exclusivity has raised concerns about its long-term competitive edge. Meanwhile, Chinese regulators have ordered Meta to unwind its USD 2 billion acquisition of AI startup Manus, citing national security risks and efforts to safeguard domestic AI talent and technology. The move underscores China's increasingly stringent approach to foreign investments in sensitive sectors like AI and adds to the geopolitical tensions ahead of the upcoming Trump-Xi summit.

Equities: Equities moved higher again yesterday, and again led by the US and tech, in what was a bit of waiting game before a storm of central bank meetings this week, earnings reports and macro data as we move further in. Cyclicals outperformed again, though not the deep cyclicals. As we have highlighted before, growth tech and the broader growth segment are carrying markets at the moment. At the other end of the spectrum, consumer staples were the worst-performing sector yesterday.

Consumer-related sectors are still struggling with the second-round effects from tariffs, and now also with the more immediate direct impact from higher oil prices, which effectively acts as a tax on the consumer. This also means that the equity rally remains highly selective. We expect that to continue for now, as the geopolitical, macro and earnings factors are all pointing in the same direction.

The rally is not only more sector-divergent; it is also becoming more regionally divided. Yesterday, the US outperformed, with cyclicals rising, while Europe underperformed and defensives did better.

This morning, Asia is mixed, once again driven by country and sector exposure, with tech higher. Japan is lagging after this morning's Bank of Japan meeting where the 6-3 vote split and a slightly more hawkish tone have pushed the yen stronger.

European futures are higher, while the picture is more mixed in the US.

FI and FX: The Bank of Japan kept its key rate unchanged at 0.75% as expected amid a 6-3 vote. The vote was a closer call than forecasted, resulting in JGB yields edging higher and a strengthening of the JPY close to 159. While the White House is weighing Iran's latest proposal, oil prices continue to climb with the June Brent future just shy of USD110/bbl. EUR/USD trades relatively steady near 1.17. Today's data calendar is light with no tier-1 releases scheduled, but we will still get the latest on consumer sentiment from both sides of the Atlantic in the form of ECB's and US Conference Board's surveys.