Outlook for the Week of May 05 – 09

Global markets face a tense week as a wave of U.S. data—including GDP, PCE inflation, and nonfarm payrolls—coincides with growing recession fears and ongoing trade tensions, especially with China. While the Fed is expected to hold rates steady, markets will parse Powell’s tone for clues on future cuts. Abroad, the Bank of England may deliver a rate cut but push back against dovish bets, while the Bank of Japan could revise growth forecasts downward. Key inflation readings from the Eurozone and Australia, along with labor data from New Zealand, Japan, and Canada, will also shape expectations. Meanwhile, China’s trade report and AMD’s earnings could further sway risk sentiment.

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Key Points to Watch Out For:

• The Fed will hold off amid tariff turmoil.
• The Bank of England will cut 25 basis points; however, it may disappoint supporters of a dovish monetary policy.
• Chinese trade data will highlight the damage inflicted by the U.S.–China trade war.
• Meanwhile, Japanese wages, Canadian employment figures, and AMD results are also in the spotlight.

The Dollar Stabilizes as Trade Tensions Ease Slightly

The U.S. dollar regained some ground last week after President Trump appeared to soften his trade stance and signed orders that mitigate the impact of his tariffs on automobiles. The White House also signaled that it is close to reaching trade agreements with India and South Korea.

However, the dollar posted its worst monthly performance since November 2022, as concerns about the broader economic repercussions of tariffs—particularly those targeting China—continued to weigh on investor sentiment. The prospects for a resolution to the U.S.–China dispute remain bleak, with China showing no signs of yielding to U.S. pressure. A telling moment came when China’s Foreign Ministry posted on social media: “China will not kneel.”

The current uncertainty and recession fears have led markets to price in nearly 90 basis points of rate cuts by the Federal Reserve before the end of the year. This reinforces the view that, despite the modest rebound in the dollar and equity markets and the decline in demand for safe-haven assets, recession risks remain high—especially after first-quarter GDP data showed that the U.S. economy contracted.

The Fed’s Decision in the Spotlight: Will Powell Strike a Dovish Tone?

With market sentiment fragile, attention is now focused on Wednesday’s FOMC decision. At its March meeting, the Fed kept rates unchanged and projected only 50 basis points in cuts for the rest of the year. However, the upcoming meeting—while not including updated forecasts or dot plots—will be scrutinized for any change in tone in the statement and in Chairman Powell’s press conference.

Following the tariff announcements and associated volatility, Fed officials, including Powell, have emphasized patience and the need for more data before changing monetary policy. This is despite growing pressure from Trump to lower financing costs. Some officials remain concerned that tariffs could fuel inflation.

Given this dynamic, the Fed could acknowledge the growing downside risks and hint at the possibility of more than 50 basis points in rate cuts. Even so, it is unlikely they will appear more dovish than current market prices. A less dovish-than-expected outcome could reinforce the Fed’s independence and support a further recovery in the dollar.

It is also worth noting that the ISM non-manufacturing PMI for April, due out on Monday, May 5, could offer insight into business confidence in the wake of the tariffs.

The Bank of England Is Set to Cut, but Could Reject Bets on a Dovish Stance

On Thursday, May 8, all eyes will be on the Bank of England. Unlike the ECB and the Fed, the Bank of England has acted cautiously, cutting interest rates at a slower pace as inflation in the U.K. remains stubbornly high.

In March, the Bank of England kept rates on hold and emphasized a “gradual and cautious” approach to monetary policy. Since then, February GDP figures showed monthly expansion of 0.5%, while year-on-year growth rose to 1.4%. Inflation moderated in March but remained above target, with core CPI at 3.4%. Strong retail sales also supported a resilient economic outlook.

However, April PMIs showed a contraction in activity, and Governor Bailey expressed concern about the potential impact of U.S. tariffs, although he also noted that the U.K. is not close to recession.

This sets the stage for a likely quarter-point cut next week. However, with market pricing in almost three more cuts before the end of the year, the Bank of England could disappoint even modest expectations. Even if policymakers adopt a softer tone, new forecasts are unlikely to justify the market’s aggressive bets on easing. A less dovish message than expected could boost the pound.

China Trade Data in Focus After Tariff Fallout

China’s April trade data, due on Friday, May 9, will be closely watched after the latest PMIs showed industrial activity contracting at the fastest pace in 16 months—snapping the two-month recovery triggered by Trump’s tariffs.

If exports show significant damage, calls for further stimulus from Beijing are likely to intensify. This could hit risk appetite and affect currencies linked to Chinese demand, such as the Australian and New Zealand dollars.

Investors could also expect a flight to safe-haven assets, boosting gold prices on speculation that China could accelerate its gold purchases to reduce its dependence on the U.S. dollar and Treasury bonds.

In addition, New Zealand’s labor market data, due out on Wednesday, May 7, in the morning, will be key for the currency.

Labor Data from Japan and Canada Could Change Expectations for Monetary Policy

Japan’s March wage data, due on Friday, May 9, could influence expectations for a rate hike by the Bank of Japan. Although traders had lowered their bets on a rate hike amid global uncertainty, recent statements by Governor Ueda reaffirming the Bank of Japan’s restrictive stance—coupled with the rise in Tokyo’s CPI—have reignited some optimism about a hike later this year.

However, following the Bank of Japan’s decision to keep rates steady and link future hikes to the evolution of tariffs, solid wage data will be needed to restore confidence in further tightening.

Meanwhile, Canada will also release its employment figures on Friday, May 9. A few weeks ago, the Bank of Canada suspended rate cuts at 2.75% after seven consecutive reductions, citing uncertainty linked to tariffs and presenting two possible scenarios instead of publishing forecasts.

Governor Macklem emphasized caution going forward. Markets are divided: they see a 60% chance of a cut and a 40% chance of a pause at the next meeting. A strong employment report could tip the balance toward no change, which would boost the Canadian dollar.

Conclusion

In the corporate arena, AMD will report earnings this week. The company previously estimated that Trump’s restrictions on exports of high-end processors to China would cost it up to $800 million. Although semiconductors benefited from partial tariff exemptions, there is still a risk of new levies being imposed in the future.

Although this quarter’s results will not yet reflect April’s turmoil, AMD’s forecasts are likely to be cautious, giving an insight into how companies plan to deal with escalating trade tensions.

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