In focus over the weekend
The Norwegian inflation figures for April will be released today. Inflation surprised strongly on the upside in February and dragged the price level into March. In line with consensus, we expect that core inflation decreased from 3.4% to 3.2% in April, driven by somewhat lower growth in food prices and other Norwegian-produced goods than in April last year.
Over the weekend US and China will kick off trade talks in Switzerland after a long deadlock in the trade war. The main goal of the talks will be to agree on lowering tariffs from the current prohibitively high rates, which are a de facto trade embargo on most goods. We believe they will agree on getting tariffs down to around 60% soon, as the economic pain is growing on both sides.
Economic and market news
What happened overnight
In South Asia, India and Pakistan continue to spiral into further tensions as the conflict worsens. Two Indian fighter jets are reported to have been shot down, artillery bombing in the Indian Kashmir region and drone attacks along India’s west boarder which Pakistan has denied.
In China, exports increased by 8.1% y/y in April, significantly more than consensus expectations of 1.9% y/y. Imports declined by just -0.2% y/y, defying consensus expectations of -5.9% y/y. The stronger-than-expected data could provide China with additional incentive to stand firm in the upcoming negotiations with the US in Switzerland over the weekend.
In Japan, real labour earnings for March declined 2.1% y/y, while household spending overshot expectations significantly at 2.1% y/y and 0.4% m/m (cons: 0.2% y/y, -0.5% m/m).
What happened yesterday
In the trade war, the UK and US announced a new trade deal. While the flat 10% universal tariff rate on the UK remains in place, the deal between the US and the UK includes a cut of tariffs on UK cars from 27.5% to 10% and a removal of tariffs on steel and aluminum. In return, the UK will offer improved access to US agricultural and industrial products and an agreement on planes. While the deal is a positive development in the trade war, many details are still to be laid out and the impact is limited.
In Germany, industrial production rose more than anticipated in March by 3.0% m/m (cons: 1.0% m/m). With the data for March, it is now more evident that the German industry has bottomed out as production has stopped declining, also seen in the PMIs for April. Data is volatile from month to month and some front loading to the US could also be at play. So, we have yet to see a clear rebound in the German industry, but at least it looks like we have hit the bottom, and we expect production to start rising this year as lower ECB interest rates feed into the sector.
In Norway, Norges Bank kept rates unchanged and avoided giving any new policy signals. The market reaction was non-existent amid very little news and low expectations. We still expect the first rate cut in September as the central bank signalled in March.
In Sweden, the Riksbank held the interest rate at 2.25% as expected. They did however suggest slight easing of monetary policy going forward. Although the tone was somewhat to the dovish side compared to recent communication, it is still quite a bit more restrictive compared to how the Riksbank communicated upcoming rate cuts last year.
In the UK, the BoE decided to cut the Bank Rate by 25bp to 4.25% yesterday. The vote split showed a surprisingly divided MPC with the statement tilting towards a hawkish bias. However, we do not see this as a broad shift in sentiment within the MPC. The statement revealed that BoE still favours a “gradual” and “careful” approach to easing monetary policy whilst highlighting elevated uncertainty. Price action in GBP was also largely driven by good news on the trade front.
Equities: Equities rallied broadly yesterday, with a distinct shift towards pro-cyclical and pro-Trump market dynamics. US equities outperformed their global peers, with cyclicals leading the charge. Small caps notably outperformed large caps, while the VIX declined. A slight note of caution could be noted as yields rose alongside oil prices. However, in the current environment, these moves should be viewed positively – as a reflection of growth optimism and rising investor confidence in the US economy. It is encouraging to witness both a stronger risk appetite and simultaneous increases in yields and oil prices. In the U.S. yesterday, the Dow was up 0.6%, the S&P 500 rose by 0.6%, the Nasdaq climbed 1.1%, and the Russell 2000 surged 1.9%. This morning, Asian equities are trading higher, led by Japan, and both European and US futures point marginally higher.
FI&FX: There was a sharp rise in global bond yields yesterday driven from the long end, where 10Y German govt yields rose some 6bp, while 10Y US Treasuries rose 5.5bp on the back of the announcement of trade deal between US and UK, where the details point to a very modest set of tariffs. Hence, this boosted the risk-on sentiment with higher yields, stronger equity markets and stronger USD.
