Fed keeps rates unchanged once more

The US Federal Reserve voted unanimously to keep the Fed funds rate on hold at its meeting overnight, leaving the upper bound unchanged at 4.50% for the third time in a row. The decision had been widely anticipated so of more interest was the statement and press conference from Chair Jerome Powell, both of which talked up the uncertainty stemming from the policies of US government under President Trump, and the impact that tariffs may have on both inflation and jobs. Powell acknowledged that the hard data has held up to date, but warned that the impact of the administration’s policies will likely become clearer down the line, and as such the administration would remain on hold for now.

Powell acknowledged that the White House was moving into a next stage of trade negotiations with other countries which made the outcome on inflation even harder to predict. It has been reported this morning that President Trump’s signposted ‘big announcement’ which is set to be announced will be a new trade deal with the UK. On the other hand, signalling around trade talks with China has been more mixed, with Trump saying that he is unwilling to preemptively reduce tariffs, ahead of Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer’s trip to Switzerland for negotiations. In other news, the White House has said that it will not enforce the AI diffusion rule, a Biden-era policy which puts countries into three different categories for the export of chips, when it takes effect on May 15. The government plans to introduce its own policy which it is claimed will be less bureaucratic.

German factory orders surprised to the upside for March as they expanded 3.5% m/m, compared with flat growth in February and beating the predicted 1.3%. On an annual basis orders were 3.8% higher, compared to a 0.2% y/y decline in February. The sharp rise in orders was broad based across different sectors and likely illustrated businesses looking to get ahead of any potential price rises that might have arisen from the US government’s introduction of wide-ranging tariffs in April.

Today’s Economic Data and Events

15:00 Bank of England bank rate. Forecast: 4.25%

16:30 US initial jobless claims, week to May 3. Forecast: 230,000

Fixed Income

• There was little change on the short end of the curve in USTs yesterday, with the Fed decision causing no surprises. Yields on the 2yr were down by less than 1bps to 3.7765%. There was more movement on the longer end as the 10yr dropped by 3bps to 4.2694%.
• Al Rajhi priced a USD 500m 5yr sukuk at +95, tighter than initial guidance. Order books were reportedly more than USD 1bn.

FX

• The dollar strengthened against all major currencies yesterday as Jerome Powell downplayed the likelihood of imminent rate cuts from the Fed, with market expectations of cuts now pushed back later in the year. The dollar index gained 0.4%, snapping three days of losses.
• The NZD and the AUD were among the biggest losers, with both closing down 1.1% to 0.5971 and 0.6456 respectively.
• EUR and GBP were both 0.6% lower at the end of the day, falling to 1.1301 and 1.3292.

Equities

• Increasingly positive news around trade negotiations from the US has bolstered equity markets there, with the NASDAQ up 0.3%, the S&P 500 up 0.4%, and the Dow Jones up 0.7% yesterday.
• Locally, the ADX dropped 0.1% while the DFM and Saudi Arabia’s Tadawul both closed 0.3% lower.

Commodities

• Oil prices fell yesterday, with Brent futures down 1.7% at USD 61.1/b, while WTI was also down 1.7%, at USD 58.1/b. Positive signals around trade talks have seen both benchmarks pick up in early trading this morning.