Crude oil prices continued higher this week as the market is becoming increasingly sceptical about the prospect of a near-term opening of the Strait of Hormuz. This pushed yields higher until the peak was reached and oil prices dropped sharply again on Thursday. The oil crunch has also triggered some action in the FX market where Japanese authorities intervened to support the yen for the first time since July 2024. Looking ahead, the UAE’s decision to leave OPEC creates a bearish outlook for oil prices, when oil starts to flow through the strait again.
The Fed kept rates on hold at Powell’s last meeting as chair. The takeaway for markets was to the hawkish side as three participants dissented against the Fed’s current easing bias and Powell decided to stay on as governor which blocks Trump from nominating a dovish replacement. This means the exit of Stephen Miran, when Kevin Warsh replaces Powell as Fed chair after the Senate Banking Committee finally advanced his nomination this week. Further, Powell specified that the majority of the FOMC did not want to send a signal that a hike would be equally likely as a cut.
Growth was slightly on the weak side of expectations in Q1, as US q/q GDP growth, fuelled by a reopening of the public sector, ended up at 0.5%, on steady but cooling private consumption. The euro area almost came to a standstill at 0.1% on the back of disappointing French growth and volatile Irish data.
The EU Commission’s April surveys highlighted the dilemma the ECB is faced with, and which the PMIs also reflected last week. They showed inflation expectations have surged among businesses and consumers, but confidence is declining. Noticeably service sector employment expectations recorded the steepest decline since the early pandemic shutdowns. So far, actual inflation shows no signs of broader price pressures. Core inflation even edged lower to 2.2% in April as service inflation declined to 3% for the first time in four years. Headline inflation on the other hand increased to 3%, digging into consumers’ purchasing power. ECB president Lagarde is “certainly not seeing second-round effects” as she put it after the decision to keep rates on hold. A rate hike was debated but the decision was unanimous.
The Bank of England also held rates steady with an “active hold” decision, as Governor Bailey phrased it and did not push back on the hawkish market pricing as tighter financial conditions push the breaks on economic activity. Japan has for long been on a very slow-moving hiking cycle. The uncertain implications for the big energy importer caused the Bank of Japan to postpone further tightening for now. We expect them to hike their policy rate to 1% for the first time since 1995 in June. Elsewhere in Asia, Chinese exports remain the key growth engine highlighted by solid April manufacturing PMIs above 50 from both official and private measures. The non-manufacturing PMI on the other hand fell below 50 and the construction sector slowdown accelerated further, leaving the economy vulnerable to a global downturn.
Next week a whole string of labour market reports is published in the US, concluding with the jobs report on Friday, where we expect a solid 80K new jobs. We expect unemployment, which is more important for the Fed, to be unchanged at 4.3%.
