Equities drifted lower in the US and most of Europe this week going into weekend talks in Switzerland between the US and China on trade. Following their recent rebound, positive developments towards a winding back of tariffs between the world's two largest economies can unlock further equity upside and put a bid back into a weak US dollar. Progress is also crucial to giving the Fed and its peers more visibility over the economic outlook. After a quiet week in Australia, the data ramps up again with updates on wages growth and the labour market coming through next week.
In the US, an uneventful Fed meeting saw rates left in the 4.25-4.5% range, an unchanged stance since December last year. Much was made of the fact that Chair Powell repeatedly stressed in the post-meeting press conference that uncertainty over the outlook was the foremost challenge that policy-setting FOMC was dealing with. Despite warning signs in the soft data (sentiment and activity surveys) and a contraction in Q1 GDP driven by increased imports to avoid tariffs, the FOMC sees underlying robustness in the US economy. The overall position, then, is that policy is seen as 'well positioned to respond in a timely way' to what unfolds. A Fed running the main risk of being late to deal with economic and labour market weakness and having to cut an at accelerated pace later on down the line is reflected in the US dollar index trading at a material discount to its levels at the start of the year and since the liberation day tariff announcements.
This week's Bank of England meeting was viewed by markets in a slightly hawkish light as developments failed to endorse a recent shift in pricing for a more aggressive easing path. On top of this, a flat reaction greeted the US-UK trade deal announced by President Trump due to the 10% baseline tariff on UK goods entering the US remaining in place. In London, the BoE cut by 25bps to 4.25% as expected, with Bank Rate now down by 100bps over the course of the easing cycle following a sequence of quarterly cuts since August last year.
Going into this week's meeting, markets anticipated a faster pace of easing may be signalled, pricing 3 cuts into the curve over the next 4 meetings in response to downside risks to growth from global trade uncertainty. However, that was ultimately tempered by the Monetary Policy Committee vowing to maintain a 'gradual and careful' approach to further easing, and also by a hugely divergent vote pattern. The decision was voted through by the MPC on a narrow 5-4 majority, with the minority split 2-2 between a larger 50bps cut (Dhingra and Taylor) and leaving rates unchanged (Pill and Mann).
In the post-meeting press conference, Governor Bailey highlighted that disinflationary progress remained intact and was expected to continue, and that global growth would be weaker with trade upended by tariffs. These factors will keep the BoE on an easing path, but questions remain around how deep the easing cycle will be and the pace of rate cuts. New forecasts in the BoE's May Monetary Policy Report were of little weight given the elevated level of uncertainty around the outlook both in the UK and offshore. Ultimately, the BoE is in wait-and-see mode and is likely to stick to its pattern of quarterly rate cuts for now.
