Key Highlights

• FOMC and eight other central banks to make decisions – a test for how much easing is needed to keep equities bid and bonds stable
•  Singapore and Australia elections, Canadian PM Carney’s visit to the U.S., local election fallout in the U.K., Trump’s budget and Congress key for ongoing bond/FX stability
• U.S. bond supply in focus, from IG issuance expected at $40 to Treasury coupon sales of $125bn and bills expected at $270bn

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What you need to know

There were a number of key events in the last week outside of Washington D.C., with the Bank of Japan on hold and cutting its outlook for inflation and growth, pushing out rate hike expectations and driving down the JPY. But the most important shift in markets came on the back of confirmation that China and the U.S. are ready to think about talking about trade. This sent into motion a revaluation of the TWD, shifted the USD lower again and added to global risk sentiment. The consensus view for May is hope that U.S. trade talks and Congressional tax discussions happen fast enough to offset fears of ongoing supply disruption fears. For the rest of the world, the 90-day pause has been a boon to help policymakers set up for more difficult economics as they come. The week ahead will pivot on these two themes – policy and politics:

1. Rate decisions and markets – FOMC on hold, BoE to cut, Riksbank on hold, Norges on hold, Brazil to hike, Czech Republic to cut. Markets are sanguine about tariff growth and inflation risks and now are looking through the noise of value. The risk in the week ahead for the FOMC will come from Chair Powell’s guidance on policy shifts ahead and how the U.S. president reacts to another hold. The debate surrounding U.S. soft vs. hard data will be central along with Q1 earnings releases for surprise shifts in the tape.
2. Singapore and Australia elections – These are two very different countries but if you ask the electorate in each, their biggest concern is the cost of living, especially house prices. This highlights the problem of local politics and the policy prescriptions to fix them in a world where trade and growth fears dominate. Australia is priced for a Canada-like outcome, where the incumbent Labour Party has staged a comeback thanks to anti-Trump sentiment. In Singapore, the PAP will win (the main opposition Worker's Party is only fielding candidates in about a quarter of seats), but the vote share will be closely watched, and it will be interesting to see if their share falls below 60%. This hasn't happened since 1963, and the world was very different back then.

USD trades from hedging bonds more than cash or safety

_{EXHIBIT #1: CROSS-BORDER FLOWS INTO USD SPOT AND FORWARD}

_{Source: BNY}

Our take: U.S. stock markets have come full circle from their sell-off on April 2. Bond markets are flat. The moves up and down beg the question of volatility going forward and the appetite for U.S. assets in general. The one thing that hasn’t recovered is the USD. The consensus for a bumpy landing in U.S. growth rather than a recession is back in vogue after U.S. NFP payrolls beat expectations and unemployment held at 4.2%. What we have seen in iFlow is that foreigners are willing to buy U.S. bonds at the right yields – i.e., risk premiums matter – and that U.S. stock markets may be more about the fully hedged return and relative value of future P/Es. For many investors, the focus has shifted away from U.S. exceptionalism. As Exhibit #1 shows, USD demand in the FX forward market slipped to the lowest level in a year. For U.S. investors, the home bias that started in April reversed by the end of the month, with interest in EMEA and some APAC markets clearly in play. European banks and Indian tech are notable destinations linked to hopes of a trade deal and relative value metrics.

Forward look: The future for the USD remains dependent on the extent of the opportunity for U.S. assets to compete against investments abroad. The FX market is a shock absorber for economic and policy shocks. The role of tariffs in the sell-off on April 2 has led to a rethinking of growth in the U.S. and the rest of the world. As the April data and deals come forward, markets will react to new projections. For many, the USD becomes a barometer of the relative growth differential expectations for the rest of the year. Our view is that there is more room for the USD to fall to help drive U.S. growth and value metrics. To put a number on that for equities, another 5% decline in the USD would offset much of the current 12-month forward P/E at 19 rather than 15. Similarly, a weaker USD would help make U.S. bond yields more attractive for carry trades.

What We Are Watching

FOMC decision after better-than-expected jobs report and improved stock markets vs. more data

_{EXHIBIT #2:  IMPLIED FED FUNDS}

_{Source: BNY, Bloomberg}

Our take: With a strong job market print from April now behind us, the market’s next focus in the U.S. will be the FOMC meeting on Wednesday. The were be no change in rates at this gathering and the market knows this – it’s pricing in just a 6% chance of a rate cut. The press conference will be the key event of this meeting, and we expect Chair Powell to continue to cite uncertainty to justify the Fed’s intention to hold rates until such uncertainty recedes. The administration continues – to varying degrees – to call for rate cuts, but we don’t think these will really happen until the July meeting. Our central forecast is for two cuts this year, although if the economy deteriorates significantly in H2 2025, we can’t rule out a third cut.

Forward look: The rest of the data calendar this coming week is fairly light, although the ISM services print on Tuesday could be illustrative as yet another forward-looking data point contributing to soft data weakness. In Canada, Friday will bring the April employment report, and after a poor GDP print last week, we’re looking for more weakness in the Canadian real economy, and a more dovish path for rate cuts from the Bank of Canada. Overall, Q1 earnings will shift from a focus on big tech to the rest of the market, with how many firms discussing tariffs and uncertainty about the outlook because of them.  Investors may also be focused on how much demand shows up for the U.S. Treasury auctions with a keen interest in foreign participation in the 10-year and 30-year auctions.

Intra-European policy divergence is clear despite tariff risk

_{EXHIBIT #3: CHANGE IN END-YEAR RATE EXPECTATIONS, DM EMEA}

_{Source: BNY, Bloomberg}

Our take: Three major Western European central banks are set to announce their policy decisions next week, drawing market attention amid a shifting monetary landscape. With the European Central Bank (ECB) clearly signaling its intention to pursue interest rate cuts over the coming quarters, one would normally expect its Continental peers – particularly those in closely aligned economies – to follow suit. Since “Liberation Day,” all rate curves in the region have shifted toward more easing (Exhibit #4). However, the inflation backdrop and economic dynamics remain uneven across the region, complicating the policy outlook. In Scandinavia, for instance, no imminent changes to policy are expected. Recent manufacturing data suggest that activity, while not accelerating, is at least stabilizing. Moreover, inflation and inflation expectations have yet to show signs of a decisive downturn. As a result, central banks in the region are likely to hold rates steady for now, adopting a more cautious, data-dependent approach.

The Bank of England (BoE), however, presents a more complex case. Of the three, it arguably carries the greatest degree of policy uncertainty. While momentum within the Monetary Policy Committee (MPC) is clearly building toward a rate cut – which we broadly agree with – recent and forthcoming data may complicate the timing. April is the month when price resets occur due to the new fiscal year, and the BoE has already warned of an inflation “hump” emerging in the near term. Governor Andrew Bailey has expressed uncertainty about whether this hump will translate into rising inflation expectations – something that could be difficult to reverse if allowed to take hold. Political dynamics may also play a role; following poor local election results, the governing Labour Party may feel pressure to implement further fiscal tightening, including cuts to government spending. We have long argued that a near recession may be required to bring inflation down meaningfully in the U.K. If the BoE shares this view, it opens the door to a more aggressive easing path – though that may not begin with this meeting.

Forward look: Currency and broader asset performance in the coming weeks are likely to be shaped more by developments on the trade front. News that China may open talks with the United States adds momentum for Europe to seek similar engagement, helping to gradually unwind trade-related risk premia across markets. While adjustments to the macro outlook will take time to be reflected in soft and hard data, we continue to expect Continental European economies to outperform. In Germany, the new government will be sworn in on Tuesday and the consolidation of fiscal plans will be essential to support regional domestic demand. The U.K. remains more vulnerable, with sterling at risk as valuations adjust to increasingly dovish central bank signals across Europe. Given how closely it has tracked interest rate expectations, any further dovish repricing could weigh more heavily on the currency. Still, broader regional currency gains may be capped for now, as dollar strength limits the upside in the near term, with GBP set to underperform regional peers. NOK is also very over-positioned and barring a major hawkish surprise from Norges, some softening in performance is likely.

Downside inflation pressure to make case for policy ease in APAC

_{EXHIBIT #4: DISINFLATION PRESSURE WITH LOWER COMMODITY PRICES}

_Source: BNY

Our take: The key focus in APAC this week is China’s April exports and trade release as well as regional April inflation data in Taiwan, Thailand and the Philippines. South Korea’s April exports released last week were at the lower end of the range, at 3.7% y/y, with a collapse in exports to the U.S. and an increase in trade with other major trading partners. The risk to China exports data this week is on the downside following the disappointing China’s April PMI manufacturing subcomponent with new orders and new export orders in the contraction zone. April’s inflation reading will be interesting to gauge the impact of both lower crude oil prices, which were down 18% in April, and diminished domestic demand as economic uncertainty continues. So far, South Korea’s April headline CPI is unchanged at 2.1%, while Indonesia’s April headline inflation normalized to 1.95% y/y with the ending of electricity subsidies.

The downside growth outlook and falling inflation are likely to tilt more regional central banks to the dovish end. Elsewhere, the Philippines and Indonesia will release Q1 GDP. The latter is worth paying attention to. The anticipated contraction in Q1 GDP might finally spur Bank Indonesia policy bias to ease in support of growth.

This weekend’s Singapore election is unlikely to shift the domestic landscape, with downside growth and inflation risks. Our view is that the Monetary Authority of Singapore (MAS) will maintain a dovish bias and the high valuation Singapore dollar is likely to underperform its peers.

Forward look: The Fed rate decision will not be the key event risk for the week ahead. Instead, that will fall to the Bank of England, Brazil’s COPOM and other emerging markets like Poland. While tariff uncertainty continues, the progress of trade negotiations or the lack of further escalation of trade tensions is positive for risk. Indeed, APAC currencies showed signs of normalization in April after a quarter of sideways trading, despite the sharp depreciation of USD. Indeed, this market outperformance is supported by iFlow data, with APAC FX scored holdings shifting back into overheld condition for the first time since October 2024, a sure sign of a shift in investor sentiment.

Bottom Line

The week ahead will see a decision by the FOMC, but there are more risks from central bank decisions in emerging markets and the BoE as they are less clearly neutral. The ability for the current market calm to hold requires forward guidance. There is also plenty of economic data from growth and inflation in the week ahead outside of the US.  How markets deal with hard data against consensus matters.  The USD and US bond markets have become interlinked in an extreme negative correlation – our flows are at the 95^th percentile of yields to the dollar.  The ability for the current uncertainty over policy to drop further requires more clarity on economic policy everywhere and what it means for global stocks and bonds in comparison to just the US exceptionalism hopes from 2024. 

Calendar for May 5-9

Central bank decisions

Czech National Bank (Wednesday, May 7): The Czech National Bank is expected to continue its rate-cutting cycle at its May 7 meeting. March inflation remained at 2.7%, right on target, but GDP growth remains subdued and consumer sentiment weak. The CNB has already lowered rates by 150 basis points since the start of the year, and more easing is expected to counteract external demand weakness, especially from Germany. Markets see another 25bp cut, although more dovish members could push for a deeper move if downside risks to growth in Germany and Europe in general materialize.

National Bank of Poland (Wednesday, May 7): Poland’s central bank is expected to cut its benchmark interest rate by 25-50bp, as MPC members have floated both positions. April CPI fell more than expected to 4.2% from 4.9%, the lowest in a year. The inflation slowdown, alongside soft wage growth and falling industrial production, has increased pressure on policymakers to ease. Some MPC members, including Governor Glapinski have already publicly endorsed cuts to support sluggish domestic demand. A cut was also demanded by Polish Prime Minster Tusk, which may draw unfavorable parallels with central bank independence issues elsewhere. Nonetheless, markets anticipate a renewed easing cycle beginning with this meeting.

FOMC (Wednesday, May 7): The will be no change in rates at the May FOMC meeting and the market knows this – it is pricing in just a 6% chance of a rate cut. The press conference will be the key event of this meeting, and we expect Chair Powell to continue to cite uncertainty in justifying the Fed’s intention to hold rates until such uncertainty recedes.

COPOM (Wednesday, May 7): Brazil’s central bank is likely to raise the Selic rate by 50bp to 14.75% at its May 6-7 meeting. April’s inflation came in hotter than expected, accelerating to 5.49% from 4.7% in March. Services and regulated prices were key drivers of the monthly 0.43% increase. Policymakers have reiterated their commitment to controlling inflation expectations, even at the expense of short-term growth. BCB President Galípolo recently warned that inflation expectations remained “unanchored.” COPOM has emphasized a data-dependent approach, but the inflation surprise has shifted market consensus toward further tightening to regain credibility.

Bank Negara Malaysia (Thursday, May 8): We expect BNM to maintain the status quo at 3.0%. Domestic macro conditions are weakening in Malaysia, with a weaker-than-expected flash Q1 GDP reading at 4.4% y/y from an upwardly revised 5.0% in Q4 2024. This, along with lower trending inflation, had prompted increasing market pricing of a rate cut to support growth. We are sympathetic to the view but see no urgency to do so yet. Further assessment of tariffs will be needed before the next move. With this, our view is BNM williwto keep rates unchanged at 3% and to highlight the potential downside risk ahead. 

Riksbank (Thursday, May 8): The Riksbank is expected to hold its policy rate steady at 2.25%. March CPI fell sharply to 0.5% year-on-year from 1.3%, well below the 2% target. However, the central bank is expected to wait for clearer confirmation that disinflation is broad-based and lasting. Core inflation and wage growth remain elevated. Policymakers are also wary of global trade disruptions and currency volatility stemming from new U.S. tariffs. A summer cut is possible, but a move this week is considered premature. On the other hand, the Riksbank would also not want to generate a large policy gap against the ECB.

Bank of England (Thursday, May 8): The Bank of England is widely expected to cut its benchmark rate by 25 basis points to 4.25%. March CPI slowed to 2.6% from 2.8%, while services inflation dipped to 4.7%. Export orders have plunged due to new U.S. tariffs, contributing to a deterioration in business sentiment. With inflation near the 2% target and domestic demand weakening, policymakers are likely to start a gradual easing cycle to support growth while remaining watchful for signs of renewed price pressure – in what Governor Bailey warned as an inflation “hump” due to price resets in the new fiscal year.

Central Reserve Bank of Peru (Friday, May 9): The BCRP is expected to leave its policy rate unchanged at 4.75%. April inflation in Lima rose to 1.65%, up from 1.28%, ending a five-month disinflation trend. Still, inflation remains comfortably within the 1–3% target range. Policymakers are likely to remain patient, monitoring external headwinds and the pace of domestic recovery before making any adjustments. The bank has signalled that further easing is not off the table, but timing will depend on incoming inflation data.

Data Calendar

Event Calendar

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