Weekly Market Recap

The Bank of England’s (BoE) Monetary Policy Committee voted 5–4 to cut its key policy rate by a quarter of a percentage point to 4.25%. However, the vote split prompted markets to price in reduced odds of a third rate cut this year, as two of the four dissenting members favoured keeping rates unchanged. Moreover, the minutes indicated that most policymakers saw the May decision as “finely balanced” before the latest global developments. The BoE reiterated that a "gradual and careful" approach to future adjustments remains appropriate.

The Royal Institution of Chartered Surveyors (RICS) said activity in the UK housing market slowed in April after the end of a tax break on home purchases for first-time buyers. The monthly house price balance fell to a nine-month low, and the number of sales dropped the most since August 2023.

Equities started the week lower, with the S&P 500 Index snapping a nine-day winning streak in a fairly quiet trading session on Monday. However, stocks recovered some losses on Wednesday following reports that US and Chinese officials plan to meet in Switzerland for trade discussions, potentially paving the way for broader negotiations and tariff de-escalation. Stocks continued to gain through Thursday, buoyed by the US and UK’s announcement of the first new trade deal since the Trump administration’s reciprocal tariffs were unveiled on 2 April, helping fuel investors’ hopes of more deals to come.

The highlight of the week’s economic calendar arguably came on Wednesday, as the Federal Reserve concluded its monetary policy meeting and announced it would be holding the fed funds target rate steady in the range of 4.25% to 4.50%, as was widely expected. In the Fed’s post-meeting statement, policymakers noted that “economic activity has continued to expand at a solid pace.” However, they cautioned that “uncertainty about the economic outlook has increased further” and “the risks of higher unemployment and higher inflation have risen.”

In a news conference following the meeting, Fed Chair Jerome Powell noted that, concerning changing monetary policy, Fed officials remain in a “wait and see” mode as they continue to assess incoming data to determine the economic impacts of the Trump administration’s significant policy changes, particularly wide-ranging tariffs, which are “likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.” Powell also acknowledged that policymakers could find themselves in a “challenging scenario” where the Fed’s dual-mandate goals—maximum employment and price stability—are “in tension.” The probability of a rate cut at the Fed’s next meeting declined during the week, according to futures markets tracked by the CME FedWatch Tool.

The week’s calendar of economic data releases was relatively light compared with the prior week. The Institute for Supply Management (ISM) did report its Services Purchasing Managers’ Index (PMI) for April, which rose to 51.6% from March’s reading of 50.8%, the 10th consecutive month of expanding activity in the sector (readings above 50% indicate expansion). Three of the four subindexes (new orders, employment, and supplier deliveries) improved month over month (MoM), and the fourth (business activity) remained in expansion territory at 53.7%. Notably, however, the prices index rose to 65.1%, the highest reading in over two years, which was largely attributed to impacts from tariffs.

Meanwhile, ISM’s Manufacturing PMI, reported in the prior week, indicated a contraction in the sector for the second month in a row in April. According to Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, “Demand and production retreated, and de-staffing continued, as panellist companies responded to an unknown economic environment.”

Sweden’s central bank, the Riksbank, kept its policy rate at 2.25% while signalling a change in outlook that suggested easier monetary policy ahead. The bank abandoned its previous position on steady rates, indicating more downside than upside risks since the March inflation forecast, because of the uncertainty resulting from the new US trade policy.

Meanwhile, Norges Bank left its benchmark rate at 4.5%, maintaining a cautious approach as inflation remains above the 2% target. "If the policy rate is lowered prematurely, prices may continue to rise rapidly," Deputy Governor Pal Longva said. "The committee's current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025," he added.

German industrial production jumped 3% sequentially in March, significantly exceeding consensus forecasts. Manufacturers increased output ahead of the imposition of new US tariffs. Factory orders increased 3.6% sequentially, after coming in flat in February.

Chinese stocks rallied early in the week on news that US and Chinese officials would travel to Switzerland for trade talks over the weekend. An unexpected policy boost by the central bank also added to positive sentiment. On Wednesday, the People’s Bank of China (PBOC) reduced its seven-day reverse repurchase rate to 1.4% from 1.5% and cut its reserve requirement ratio by half a percentage point, a move that will release roughly RMB 1 trillion in long-term liquidity in the economy, the central bank governor said. The PBOC announced other loosening measures, including rate cuts on a range of relending tools and loans for policy banks.

The measures reflected China’s increased efforts to protect the economy after the Trump administration said it would hike tariffs on most Chinese goods to 145%. On Friday, China reported that exports to other countries rose a higher-than-expected 8.1% in April but were down from March’s 12% gain. US-bound shipments sank 21% from a year ago after Washington imposed the tariff hike in early April. But exports to India, Southeast Asian countries, and the EU soared as Chinese companies offset the US sales drop with sales to other markets.

Chinese Vice Premier He Lifeng and US Treasury Secretary Scott Bessent are leading the trade talks, which are set to start on Saturday in Geneva and last for two days. T. Rowe Price economists believe that US tariffs in their current state would likely shock Chinese exports and economic confidence. However, they also believe that Beijing should have the financial capacity to reduce their impact through fiscal stimulus, which the central government could roll out in stages as it assesses the economic toll of the tariffs.

The ongoing bilateral trade negotiations between the US and Japan showed limited signs of progress. The US warned that a trade deal with Japan could take significantly more time than the framework agreement with the UK announced during the week. Japan urges the US to review its tariff measures, seeking the complete removal of reciprocal tariffs (President Donald Trump imposed a 24% tariff on Japanese goods before the 90-day pause was announced) and the additional 25% levies on autos, steel, and aluminium. Agriculture is likely to be a focal point for the US, as it seeks to open Japan to American agricultural products further.

The latest economic data raised some concerns about the outlook for Japan’s economy, which is already facing headwinds from tariff risks and their potential to delay the monetary policy normalisation process of the Bank of Japan (BoJ). Real (inflation-adjusted) wages fell for the third consecutive month in March, declining 2.1% year on year (YoY). Nominal wage growth of 2.1% YoY fell short of consensus estimates of 2.3% YoY and the previous month’s 2.7% YoY increase. The BoJ is watching for a virtuous cycle of wages rising in tandem with prices that boosts the economy. Still, the central bank recently warned of extremely high uncertainty on the outlook due to the impact of trade and other policies in each jurisdiction, with risks to economic activity and prices skewed to the downside.

The Australian Labour Party was re-elected following Saturday's federal election, with leader Anthony Albanese winning a second term as Prime Minister. The victory bought the party another six years to address the nation’s productivity crisis, reform the tax system and repair broken environmental laws while unions clamoured for more worker benefits.

Australia's residential building approvals declined by 8.8% MoM in March, well below the market expectation of -0.6% MoM. The decline was broad-based across detached and higher-density dwellings, with the value of renovation approvals also declining in the month. However, the residential building approvals rose 3.8% on a quarter-over-quarter basis.

According to Statistics Canada, Canada's unemployment rate rose 0.2% to 6.9% in April, the highest since November, as employment grew by just 7,400 positions. April is the third month in a row where the Canadian economy saw very little change in employment or job losses, underscoring a slowdown in hiring or downsizing amid trade uncertainty. The weak job market data increases the likelihood of a Bank of Canada rate cut in June, with economists citing the negative impact of tariffs on the economy and the potential for severe job losses to lead to a deeper economic contraction.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.2% (1.4% YTD).

The US S&P 500 Index was down -0.4% for the week (-3.3% YTD). Growth shares underperformed value stocks, and small caps outperformed large caps. The Russell 1000 Growth Index returned -0.6% (-6.5% YTD), the Russell 1000 Value Index was flat (0.5% YTD), and the Russell 2000 Index returned 0.1% (-8.9% YTD), posting gains for the fifth consecutive week. The technology-heavy Nasdaq Composite gave back -0.3% (-7.0% YTD).

In Europe, the MSCI Europe ex UK Index ended the week 0.5% higher (8.4% YTD), rising for a fourth consecutive week amid hopes of easing trade tensions between China and the US. Most major stock indexes gained. Germany’s DAX Index put on 1.8% (18.0% YTD), France’s CAC 40 Index added 0.2% (6.4% YTD), and Italy’s FTSE MIB Index climbed 2.7% (16.7% YTD). Switzerland’s SMI Index slipped -1.3% (7.1% YTD). The euro was little changed against the US dollar, closing the week at USD 1.13 for EUR.

The FTSE 100 Index in the UK eased -0.4% (6.3% YTD), and the FTSE 250 Index rose 1.3% (0.7% YTD). The British pound was stable against the US dollar, closing the week at USD 1.33 for GBP.

Japan’s stock markets gained over the holiday-shortened week. The TOPIX Index advanced 1.7% (-1.3% YTD), and the TOPIX Small Index rallied 2.3% (1.2% YTD). The yen weakened past JPY 145.4 against the US dollar from JPY 145.0 at the end of the prior week, hovering around a one-month low. The greenback strengthened notably on the announcement of a US-UK trade deal and confirmation by China that its trade negotiations with the US are due to begin. The yield on the 10-year Japanese government bond (JGB) rose to 1.36% from 1.26% at the end of the previous week, as safe-haven demand for JGBs dissipated on global trade optimism.

In Australia, the S&P/ASX 200 Index added 0.1% (2.6% YTD). The negative news of declining residential building approvals was offset by the positive tariff development that China’s vice president will negotiate with Bessent in Switzerland. Australian government bond yields moved higher, with the curve largely unchanged. The Australian dollar weakened against the US dollar by 0.5%.

In Canada, the S&P/TSX Composite put on 1.3% (3.5% YTD).

The MSCI Emerging Markets Index was 0.5% higher (6.8% YTD), with the stock markets of China, Taiwan, South Korea and Brazil contributing positively to performance, and that of India contributing negatively.

Mainland Chinese stock markets advanced in an abbreviated trading week ahead of US trade talks. The onshore CSI 300 Index added 2.0% (-1.9% YTD), and the Shanghai Composite Index advanced 1.9% (0.1% YTD). Hong Kong's benchmark Hang Seng Index gained 1.7% (15.3% YTD). MSCI China Index tacked on 0.8% (13.2% YTD). Markets in mainland China were closed on Monday, 5 May, for the Labour Day holiday.

In the Czech Republic, the Czech National Bank held its scheduled monetary policy meeting, and policymakers decided to reduce its main policy rate, the two-week repo rate, from 3.75% to 3.50%. Central bank officials also reduced the discount rate from 2.75% to 2.50% and the Lombard rate from 4.75% to 4.50%. While generally expected, the decision to reduce rates was not unanimous among all seven bank Board members. One member voted in favour of leaving interest rates at current levels.

According to the central bank’s post-meeting statement, the decision to reduce rates was supported by a substantial year-to-date decline in global commodity prices, reduced global economic growth forecasts from international institutions, and a tightening of global financial conditions. A recent “flash” estimate of 1.8% inflation in April may have also given central bank officials leeway to reduce rates.

However, policymakers characterised their action as “very cautious,” acknowledging that “persisting stronger inflation pressures…are limiting room for further rate cuts.” They specifically cited “elevated” services inflation, above-average wage growth, and a significant increase in property prices as factors that “pose risks to long-term price stability.” In addition, central bank officials asserted their “determination…to maintain inflation near the 2% target in the long run.” They concluded that this requires monetary policy to remain “relatively tight” at this time.

In Poland, the central bank concluded its two-day monetary policy meeting, and policymakers decided to reduce the key interest rate, the reference rate, by 50bps from 5.75% to 5.25%. This was the first rate cut for Poland in about one and a half years. Other interest rates controlled by the central bank were reduced by a similar amount.

According to the post-meeting statement, policymakers reiterated their view that the outlook for global inflation and economic activity is “subject to uncertainty” related to changes in trade policies and other factors. In the Polish economy, central bank officials indicated that first-quarter economic activity growth “was probably lower than expected and somewhat lower” than in the fourth quarter of 2024. They cited factors such as negative annual growth rates of retail sales and construction and assembly production in March, as well as a “lowering of wage growth” in the enterprise sector. As for inflation, policymakers noted that the annual consumer price index (CPI) inflation rate fell from 4.9% in March to 4.2% in April, reflecting the “fading away” of base effects on food price dynamics as well as lower oil and fuel prices amid a weakening US dollar.

Policymakers acknowledged that previous increases in “administered energy prices” and “continuously heightened annual growth in prices of food and non-alcoholic beverages” keep CPI inflation elevated. However, based on factors such as “lower current and forecasted inflation, decreasing wage growth and weaker data on economic activity,” central bank officials felt justified in their decision to reduce rates at this time. While they gave no clarity about possible additional rate cuts, they asserted that “further decisions…will depend on incoming information regarding prospects for inflation and economic activity” against a background of uncertainty regarding the labour market, fiscal policy, overseas inflation, and “changes in trade policies of major economies.”

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.1% (1.6% YTD), the Bloomberg Global High Yield Index (hedged to USD) 0.3% (1.7% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index returned -0.1% (3.0% YTD).

US Treasuries generated negative returns as yields fluctuated, but generally increased after the Fed’s rate announcement and positive trade headlines. Over the week, the 10-year Treasury yield rose 7bps, ending at 4.38% from 4.31% (down -19bps YTD). The 2-year Treasury yield rose 6bps, ending the week at 3.89% from 3.83% (down -35bps YTD).

Volumes in the US high yield bond market were light during the week, with investors focused on earnings while awaiting commentary following the Fed’s policy meeting. The light primary issuance calendar, positive flows, and building cash levels created favourable technical conditions in the sector.

Over the week, the 10-year German bund yield increased 3bps, ending at 2.56% from 2.53% (up 20bps YTD). The 10-year UK gilt yield increased 6bps, ending the week at 4.57% from 4.51% (flat YTD).