The week ahead will be seen with respect to more trade discussions between China & US which look like going smoothly till now. We expect in a best case scenario US tariffs on China can fall to as low as 35% and in a reasonably average output from negotiations, we can see tariffs ranging in total between 55-65%. In either case it might lead to a relief rally in global risk assets including US equities. But we dont believe this rally has much room left further. In US macro data, we have April CPI, retail sales, PPI and housing starts data. We expect a rebound in core CPI inflation in April to 0.31% m-o-m following an unexpected slowdown in March, but the impact of tariffs likely remained limited. Our forecast for April core PCE inflation is +0.17% m-o-m, close to an annual rate of 2.0%. Despite higher core goods prices, lower prices for portfolio management services and airline fares likely weighed on core PCE inflation in April. Headline retail sales likely fell 0.1% m-o-m from a 1.4% m-o-m increase in March. Survey data might look tad better than market estimates this week. Hence we expect short end UST yields to see an uptick this week but we believe these will be good buying points. We like to buy 2 yr UST around 4% (CMP 3.89) & 5 yr UST around 4.15% levels (CMP 4.0%). In Fed speak, we have Fed Chair Powell speaking on Thursday where we expect him to speak more of the same on Fed being patient. In Eurozone data we expect recovery in ZEW survey for Germany as well as industrial production. We expect the euro area economy to recover only gradually in the near term due to soft consumption and structural weaknesses. We believe US tariffs will be an important immediate headwind, whereas German and EU fiscal announcements will be a material tailwind only in the medium term. We now expect ECB rates to be cut to sub-neutral and have lowered our terminal rate forecast to 1.50% (cuts in June, July and September). In UK data this week, we expect weaker GDP, lower employment nos and lower wages. UK Bank Rate now stands at 4.25%, still above where we think the neutral range is (3- 3.50%). We continue to look for a further 75bp of cuts by BOE to a terminal rate of 3.50% by early next year.
