Reports that the lines communication for trade negotiations between the US and China may be starting to open and solid US data supported risk-on sentiment this week. Fed rate cut expectations for the remainder of the year were pared back modestly from 4 rate cuts through the remainder of 2025 ahead of next week's FOMC meeting. In the markets, equities advanced broadly, and the US dollar weakened on most of the major crosses - the JPY the exception as the BoJ left rates steady while lowering their growth and inflation forecasts in response to the uncertainty around global trade. Domestically, an RBA rate cut in May has been locked into the curve following encouraging disinflationary progress in Q1.
Underlying US economic conditions appeared to remain robust going into the uncertainty of administration's liberation day tariff announcements. While US GDP posted its weakest outcome in 3 years contracting by 0.1%q/q (2.1%Y/Y), that was driven by a pull-forward of imports (9%q/q), which contributes negatively to growth calculations, ahead of the impending tariffs. Despite the headline fall in growth, domestic demand was still running at solid pace (0.6%q/q, 2.9%Y/Y), supported by resilient household consumption (0.4%q/q, 3.1%Y/Y) amid tanking sentiment. Meanwhile, the labour market also remained solid as nonfarm payrolls posted a 177k increase in April, outperforming the 138k consensus and holding the unemployment rate at 4.2%, even with a slight rise in participation to 62.6%. The unknown remains around inflation. The Fed's preferred core PCE deflator eased closer to target falling from 3.0% to 2.6%yr in March, but the effects of tariffs will likely push that figure higher.
In Europe, GDP growth picked up in the March quarter lifting to 0.4% from 0.2% in the prior quarter, holding the year-ended pace at 1.2%. Stronger growth into the optimism around the outlook for the region on the back of the shift in Germany's fiscal regime has sent the trade weighted euro to all-time highs in recent weeks and supported equity gains. But with the uncertainty around global trade set to weigh on euro area growth, the ECB is expected to cut rates again in June. Meanwhile, April's preliminary inflation readings showed the headline gauge holding at 2.2%yr but rising from 2.4% to 2.7%yr on the core measure.
Australia's March quarter inflation report shored up pricing for an RBA rate cut in May to 3.85%, with additional easing lowering the cash rate to around 3% by year-end. Seasonality and the unwinding of government subsidies for electricity bills pushed up inflation in the March quarter, with headline CPI lifting from 0.2% to 0.9% and the core or trimmed mean measure up from 0.5% to 0.6%, both outcomes 0.1ppt above consensus. Still, annual inflation is within the RBA's 2-3% target band, holding steady at 2.4% in headline terms and the core rate easing from 3.2% to 2.9%, the latter at its slowest pace since late 2021. Additionally, there are encouraging signs that the broader disinflationary process is well entrenched. The momentum in core inflation annualises at 2.5% over the past 6 months, the midpoint of the RBA's 2-3% target. Meanwhile, price pressures in stickier services categories have clearly slowed. Services inflation eased from 4.3% to 3.7% year-on-year, its slowest pace in almost 3 years. For more on the Q1 CPI report please see my review here. Also in Australia this week, retail sales volumes were subdued in Q1 (see here), and the trade surplus widened to $6.9bn in March (see here).
