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We expect the Bank of Canada will forego an interest rate cut on Wednesday in another close call following April's pause after seven consecutive cuts.

Arguments for a rate cut still remain. Labour markets have weakened, particularly in manufacturing where jobs dropped by 30,600 in April—the largest one-month decline since the pandemic—pushing unemployment to 6.9% from 6.6% in Q1. Housing markets have cooled, reducing the risk that lower rates would reignite surging prices. Gross domestic product growth has remained positive, but the monthly pace slowed sharply after a surge in production in January.

However, the limited data since the BoC’s last decision in April hasn't been entirely negative. Our RBC cardholder tracking shows consumer spending held up better than expected in March and April despite lower survey-based confidence measures.

Friday's Canadian employment report for May (following the BoC decision) will likely show continued weakness in the industrial sector, but recent job postings on Indeed.com suggests hiring demand may be stabilizing. We expect employment to hold steady in May with the unemployment rate remaining at 6.9%.

April’s inflation data also surprised to the upside after accounting for the eliminated consumer carbon tax, driven more by domestic services growth than the impact of tariffs on imports.

Meanwhile, Thursday's international trade data will likely show a widening Canadian trade deficit with exports falling more than imports. U.S. imports plunged 19.8% in April as the U.S. administration imposed reciprocal tariffs on most U.S. trade partners.

Significant U.S. tariffs remain in place. A U.S. court ruling blocking some of the Trump administration’s tariffs (including blanket tariffs on most U.S. trade partners in April) is under appeal, and the tariffs are still in effect for now. But CUSMA-compliant Canadian exports were already exempt from those measures. Sector-specific U.S. tariffs on steel, aluminum and vehicles remain as well, but we estimate more than 86% of Canadian exports still receive duty-free U.S. market access under the current rules.

The BoC has already cut rates by 225 basis points over the past year—more than other central banks. It still has room for further cuts if economic conditions weaken, but will need to consider any government spending support measures, which are better suited to provide targeted, timely, and temporary assistance to affected sectors than interest rate cuts.

Week ahead data watch

We expect U.S. payrolls likely grew by 162,000 in May, slightly down from the 177,000 in April. We also believe the unemployment rate held steady at 4.2%. The details will be closely watched for signs of softening in trade-sensitive sectors like manufacturing, but weekly initial jobless claims have remained low.

The U.S. trade deficit narrowed sharply in April in advance estimates with goods imports plunging 19.8% to retrace a pre-tariff run up, and exports rose slightly by 3.4%. The drop in imports likely partially reflected a reversal of a pre-tariff surge in gold imports, which won’t pass through to GDP measures for Q2. But, imports of autos and (non-auto) consumer goods declined by 19.1% and 32.3%, respectively.

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Consumer spending decelerated in April despite a modest acceleration in income growth. Personal income advanced by 0.8% month-over-month (m/m), well ahead of consensus expectations for a 0.3% m/m gain. This strength, however, did not filter through to spending, which cooled to a gain of 0.2% on the month. As a result, the personal savings rate rose to 4.9% - it's highest level in a year.

On an inflation-adjusted basis, spending grew by a modest 0.1% m/m after a particularly strong performance in March. A decline in goods spending (-0.2% m/m) primarily drove this trend, as March's outsized vehicles sales volumes moderated slightly in April. Services spending growth also softened, but remained stable at 0.3% m/m.

Inflationary pressures changed little in April, with core PCE matching the 0.1% m/m gain seen in March. In annual terms, core PCE fell to 2.5% - its lowest level in four years

Key Implications

Consumer spending came off the burner in April as the implementation of reciprocal tariffs weighed on consumer confidence and began to bring an end to the front-loading behavior we had seen in March. Moving forward, we expect consumer spending to grow at a modest pace of 1.8% in the second quarter as the economy continues to adapt to a higher cost environment.

On the price front, we saw the Federal Reserve's preferred inflation metric - core PCE - continue to ease in April. However, moving forward it is likely that the tariff policies in effect will begin to influence consumer prices. We expect that barring an alteration in tariff composition, core PCE will rise above 3% by the second half of this year. The federal court rulings this week against the bulk of the administration's tariffs, while subsequently stayed pending appeal proceedings, adds an additional layer of uncertainty that is likely to prevail over businesses, the labor market, and by extension consumer spending in the months ahead.

Daily Pivots: (S1) 1.1258; (P) 1.1322; (R1) 1.1432; More...

Intraday bias in EUR/USD remains neutral at this point. On the upside, break of 1.1417 resistance will revive the case that correction from 1.1572 has completed at 1.1064. Retest of 1.1572 should then be seen next. Nevertheless, break of 1.1209 will extend the corrective pattern and target 1.1064 support and possibly below.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will remain the favored case as long as 55 W EMA (now at 1.0858) holds.

Daily Pivots: (S1) 1.3437; (P) 1.3472; (R1) 1.3529; More...

Range trading continues in GBP/USD and intraday bias remains neutral. With 1.3389 support intact, further rally is expected. On the upside, firm break of 1.3592 will resume larger rally for 100% projection of 1.2706 to 1.3442 from 1.3138 at 1.3874. However, decisive break of 1.3389 will confirm short term topping, and turn bias back to the downside for 1.3138 support instead.

In the bigger picture, up trend from 1.3051 (2022 low) is in progress. Next medium term target is 61.8% projection of 1.0351 to 1.3433 from 1.2099 at 1.4004. Outlook will now stay bullish as long as 55 W EMA (now at 1.2870) holds, even in case of deep pullback.

Daily Pivots: (S1) 143.34; (P) 144.81; (R1) 145.66; More...

Intraday bias in USD/JPY stays neutral at this point. On the upside, above 146.27 will target 148.64 resistance first. Firm break there will resume the rebound from 139.87. Nevertheless, break of 142.10 will bring deeper fall back to 139.87 low.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low), with fall from 158.86 as the third leg. Strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8182; (P) 0.8265; (R1) 0.8312; More….

Range trading continues in USD/CHF and intraday bias stays neutral. On the downside, break of 0.8187 will resume the fall from 0.8475 to retest 0.8038 low. On the upside, above 0.8346 will bring stronger rise to 0.8475. Firm break there will extend the corrective pattern from 0.8038 with another rising leg.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress and met 61.8% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.8079 already. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.8713) holds. Sustained break of 0.8079 will target 100% projection at 0.7382.

Market sentiment took another bearish turn today following renewed rhetoric from US President Donald Trump, who accused China of having "totally violated" its preliminary trade agreement with the U.S. The comments, delivered via social media, were echoed by Trade Representative Jamieson Greer in a CNBC interview, where he expressed concern over China's delayed compliance. Greer emphasized that while the US had fulfilled its commitments under the temporary trade deal, China was "slow rolling" its response—raising fears that tensions between the two economic powers may be re-escalating.

These remarks followed comments from Treasury Secretary Scott Bessent just a day earlier, who admitted that US-China trade talks were “a bit stalled,” though he hinted at possible high-level engagement in the coming weeks. However, the combined messaging from senior officials now points to growing frustration in Washington, increasing the risk of a renewed tariff cycle. That's something the markets are highly sensitive to, especially with ongoing legal uncertainty surrounding the court-blocked reciprocal tariffs and their pending appeal.

On the macro front, the US April core PCE price index ticked down to 2.5% year-on-year, reaffirming that disinflation is progressing, albeit slowly. With inflation trending lower but global uncertainty mounting, Fed is widely expected to hold rates steady in the near term. Fed funds futures currently price in a 95% chance of a hold at the June FOMC meeting and a 73% chance of another hold in July. The soft inflation reading does little to shift the central bank’s cautious stance, especially as trade risks remain firmly in focus.

In the currency markets, Dollar is heading into the final house of the trading week as the strongest performer, followed by Swiss Franc and Euro. On the weaker end, Aussie struggles at the bottom, trailed by Yen and Loonie. Kiwi and Sterling are holding in the middle. However, with sentiment remaining fragile and trade headlines still in play, positioning could shift quickly before the weekly close.

In Europe, at the time of writing, FTSE is up 0.55%. DAX is up 0.72%. CAC is up 0.09%. UK 10-year yield is up 0.21 at 4.672. Germany 10-year yield is up 0.019 at 2.529. Earlier in Asia, Nikkei fell -1.22%. Hong Kong HSI fell -1.20%. China Shanghai SSE fell -0.47%. Singapore Strait Times fell -0.57%. Japan 10-year JGB yield fell -0.015 to 1.505.

US core PCE inflation cools to 2.5%, income surges

US headline PCE price index rose 0.1% mom in April, in line with expectations, while annual inflation slipped from 2.3% yoy to 2.1% yoy, below the consensus of 2.2%.

Core PCE, Fed’s preferred inflation gauge, also rose 0.1% mom and slowed from 2.6% yoy to 2.5% yoy, matching expectations. The data supports the view that disinflation remains intact, though the pace of moderation remains modest.

At the same time, personal income data surprised to the upside, jumping 0.8% mom or USD 210.1B, well above the expected 0.3% mom. Personal spending rose a more modest 0.2% mom, matching forecasts.

Canada GDP expands 0.1% mom in March, another 0.1% mom in April

Canada’s GDP grew by 0.1% mom in March, in line with market expectations. Strength in goods-producing industries continued to support overall output. The sector expanded by 0.2%, marking its second lead contribution in the past three months.

Services-producing industries also edged higher by 0.1%. In total, 9 out of 20 sectors posted growth.

Looking ahead, preliminary data from Statistics Canada suggests another 0.1% increase in real GDP for April.

ECB’s Panetta signals diminished room for further rate cuts

Italian ECB Governing Council member Fabio Panetta said today that while the central bank has made meaningful progress in easing monetary policy, bringing the deposit rate down from 4% to 2.25%, "the room for further rate cuts has naturally diminished".

"However, the economic outlook remains weak, and trade tensions could lead to a deterioration," he added. "It will be essential to maintain a pragmatic and flexible approach, considering liquidity conditions and the signals coming from financial and credit markets."

Panetta also highlighted the high-stakes nature of ongoing trade talks between the EU and the US, warning that even tensions are likely to have a “significant impact” on the region’s economy.

BoE’s Taylor: Global headwinds justify lower monetary policy path

BoE MPC member Alan Taylor reinforced his dovish position in an interview with the Financial Times, highlighting growing downside risks to the UK economy from global developments.

Taylor, who alongside Swati Dhingra voted for a larger 50bps rate cut in May, argued that monetary policy should be on a “lower policy path” given the accumulating headwinds.

He specifically pointed to impact of Trump’s tariffs on imports would “be building up over the rest of this year in terms of trade diversion and drag on growth”.

While UK inflation unexpectedly jumped to 3.5% in April, Taylor downplayed the significance of the rise, attributing it to "one-time tax and administered price changes."

Swiss KOF rises to 98.5, but growth outlook remains subdued

Switzerland’s KOF Economic Barometer edged up to 98.5 in May from 97.1, marking a modest improvement in economic sentiment. While the uptick is a positive signal, the barometer remains below its long-term average, suggesting that the broader outlook for the Swiss economy "remains subdued".

According to the KOF, the manufacturing sector showed notable strength, contributing to the overall improvement. However, indicators tied to foreign demand and private consumption remain under pressure, highlighting the ongoing drag from weak external conditions and cautious domestic spending.

Japan's industrial production falls -0.9% mom in April, but May rebound expected

Japan's industrial production fell by -0.9% mom in April, a milder decline than the expected -1.4%. The Ministry of Economy, Trade and Industry maintained its view that production "fluctuates indecisively," reflecting ongoing uncertainty, particularly around global trade developments.

While the ministry said the impact of US tariffs was limited in April, some firms have voiced concern about the manufacturing outlook as policy risks persist.

The breakdown of the data shows a mixed picture: six of 15 industrial sectors saw declines, including production machinery, fabricated metals, and transport equipment excluding motor vehicles. However, eight sectors recorded gains, with electronic parts and business-oriented machinery showing notable strength.

Manufacturers surveyed expect a sharp 9.0% rebound in May, followed by a -3.4% dip in June.

Also released, Japan's retail sales grew by a stronger-than-expected 3.3% yoy in April, outpacing the consensus of 2.9% yoy. Meanwhile, the unemployment rate remained steady at 2.5%.

Tokyo core inflation accelerates to 3.6%, driven by food and services costs

Tokyo's core CPI (excluding fresh food) accelerated to 3.6% yoy in May, up from 3.4% yoy and above market expectations of 3.5% yoy, marking the fastest pace since January 2023. This marks the third consecutive year that core inflation has exceeded the Bank of Japan’s 2% target.

While headline CPI ticked down slightly from 3.5% yoy to 3.4% yoy, the underlying core-core measure (excluding food and energy) also edged up fro 2.0% yoy to 2.1% yoy, suggesting broad-based inflation persistence.

The surge in non-fresh food prices, up 6.9% yoy, remains a dominant driver—highlighted by a staggering 93.2% yoy jump in rice prices.

Another notable development is the uptick in services inflation, which climbed to 2.2% yoy from 2.0% yoy , indicating that businesses are beginning to pass on higher labor costs.

Australia retail sales down -0.1% mom in April, weighed by weak clothing demand

Australia’s retail sales turnover unexpectedly declined by -0.1% mom in April, missing expectations for a 0.3% mom rise. On an annual basis, sales were up 3.8% compared to April 2024/

The Australian Bureau of Statistics noted that the decline was driven primarily by reduced spending on clothing. The weakness was partly offset by a rebound in Queensland, where businesses recovered from disruptions caused by ex-Tropical Cyclone Alfred in March.

RBNZ's Silk: Data to guide timing and need for further cuts

RBNZ Assistant Governor Karen Silk said that interest rates are currently within the estimated neutral band of 2.5% to 3.5%.

She noted that the full impact of previous easing has yet to filter through the economy, making any future adjustments highly dependent on incoming data.

The OCR track indicates "whatever we do is going to be data-dependent, and then we will be looking to the data to help us to decide when or if we cut further from here," she added.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.8182; (P) 0.8265; (R1) 0.8312; More….

Range trading continues in USD/CHF and intraday bias stays neutral. On the downside, break of 0.8187 will resume the fall from 0.8475 to retest 0.8038 low. On the upside, above 0.8346 will bring stronger rise to 0.8475. Firm break there will extend the corrective pattern from 0.8038 with another rising leg.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress and met 61.8% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.8079 already. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.8713) holds. Sustained break of 0.8079 will target 100% projection at 0.7382.

Canada’s GDP grew by 0.1% mom in March, in line with market expectations. Strength in goods-producing industries continued to support overall output. The sector expanded by 0.2%, marking its second lead contribution in the past three months.

Services-producing industries also edged higher by 0.1%. In total, 9 out of 20 sectors posted growth.

Looking ahead, preliminary data from Statistics Canada suggests another 0.1% increase in real GDP for April.

Full Canada's GDP release here.

US headline PCE price index rose 0.1% mom in April, in line with expectations, while annual inflation slipped from 2.3% yoy to 2.1% yoy, below the consensus of 2.2%.

Core PCE, Fed’s preferred inflation gauge, also rose 0.1% mom and slowed from 2.6% yoy to 2.5% yoy, matching expectations. The data supports the view that disinflation remains intact, though the pace of moderation remains modest.

At the same time, personal income data surprised to the upside, jumping 0.8% mom or USD 210.1B, well above the expected 0.3% mom. Personal spending rose a more modest 0.2% mom, matching forecasts.

Full US personal income and outlays release here.