European equities stood out this week posting strong gains to close at or near record highs. US equities and most Asian indices saw steady rises. Moves on key currency crosses were limited, though the US dollar rebounded against the Yen following last week's interventions by the authorities in Japan. US CPI data is the key risk event next week, while in Australia the Federal Budget and reports on wages (Q1) and the labour market (April) are ahead.
There was lull of key events out of the US this week, leaving markets continuing to trade the narrative of April's softer-than-expected payrolls report validating dovish Fed messaging on 2024 rate cuts. This will be put to the test next week with CPI and retail sales data due on Wednesday. Producer prices (Tuesday) will give markets an early steer to the CPI outcome. Meanwhile, Chair Powell is set to speak in Europe (Tuesday), headlining a busy week of appearances from other Fed officials, notably NY Fed President Williams (Thursday) and Governor Waller (Friday).
The Bank of England's Monetary Policy Committee (MPC) held a steady hand on interest rates (5.25%) and on its guidance that policy "needs to be restrictive for an extended period" at this week's meeting, but with the MPC sounding less concerned about the risks of inflation remaining persistently elevated the easing cycle appears to be nearing. Post-meeting rates pricing indicates the timing of the first cut is a close call between June and August, set to swing one way or the other on the upcoming data. Meaningful steps towards the easing cycle were inferred from developments including the MPC's 7-2 vote (as Ramsden joined Dhingra in voting for a cut); new forecasts projecting inflation to fall below target over the next couple of years; and dovish comments from Governor Bailey at the media conference, notably that it was "likely" rates would need to be cut "over the coming quarters" and that it was possible more cuts would be needed than is currently priced into markets.
Those comments about the potential for lower interest rates was in the context of downward revisions to the inflation outlook in the May Monetary Policy Report. Conditional upon the market-implied path for the BoE's interest rate, inflation is projected to come back to the 2% target within a two-year timeframe - two quarters earlier than previously anticipated - and to then fall further to 1.6% in 2027. Governor Bailey's point was that a scenario where interest rates are cut by more than currently priced may be needed if, in the current best judgments of the Bank, inflation risks falling below target by the end of the forecast horizon. A key part of that assessment is that the MPC now assesses that the risk of high inflation persisting due to 'second-round' effects on wages and prices has eased; however, Governor Bailey said there were varying views on this judgment amongst individual MPC members.
Over at the ECB, the account of the April meeting effectively set out the roadmap to culminate in a June rate cut. For "a few members" there was a strong enough case to cut in April but ultimately the majority of the Governing Council needed a little more convincing. Comments from many ECB officials since that meeting indicate the threshold to cut will be crossed in June. The policy outlook beyond June is highly uncertain, however, and is likely to be conditional upon the ECB staff macroeconomic projections to be updated at the next meeting.
Attention domestically was on the RBA's policy meeting. The Board's decision to keep rates unchanged (4.35%) was no surprise but there was a strong reaction in markets via a weaker AUD and lower bond yields as the neutral guidance that it was "not ruling anything in or out" was retained and then reaffirmed in the press conference against expectations for a more hawkish lean. Updated forecasts in the May Statement on Monetary Policy lifted the near-term inflation outlook; however, the return to the midpoint of the 2-3% target band remained on a mid-2026 timeframe under a higher for longer cash rate path. More detailed analysis can be found in my review of the RBA meeting here. On the data docket this week, retail trade volumes contracted 0.4% in the March quarter, a weak outturn that underscored the headwinds to household consumption from the increased cost of living and higher interest rates (see here).
