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Today is a quiet day on the data front. In the euro area, focus is on March retail sales and German factory orders. Consumers are still cautious with spending amid low unemployment and rising real incomes so we expect muted spending.

We revise our Fed call to 2 rate cuts of 25bp this year in September and December. It will be a close call between July and September but with macro indicators showing no signs of sudden weakening, we lean towards September as our base case.

Mixed signals from the Israel-Hamas war, as yesterday afternoon first brought reports of explosions in Rafah, the southernmost area of the Gaza strip, and that the IDF were evacuating residents in the area which indicated that Israel could be preparing for an attack on the area which houses 2.3 million refugees. In the evening, Hamas then announced it had accepted a ceasefire deal from Egyptian/Qatari mediators to which Israeli officials responded that no such deal had been reached, according to Reuters. As of this morning it is clear Israel has not agreed to a ceasefire, but says it is sending a delegation to negotiate with mediators while continuing operations in Rafah which is yet to turn into a major operation.

This morning the Reserve Bank of Australia kept its cash rate fixed at 4.35% as widely expected. Markets have pushed back their rate cut expectations significantly recently after the clear upside surprise in Q1 inflation data.

Markets seemed to continue to challenge the Japanese authorities’ fortitude after last week’s suspected intervention which brought USD/JPY to 152.98 (-3.1%) on Friday, as the cross gained 0.6% during the day and climbed further past 154 overnight, up some 0.5% as of this morning, after top currency official Kanda said there was no need to intervene if “the market is functioning properly”. The dovish signals from the US have supported the yen, but authorities continue to be in a bind as there are still signs of substantial rate differentials in the near-term, which complicates any persistent effects of an intervention.What happened yesterday

In the US, both Richmond Fed President Barkin and NY Fed President Williams on separate occasions said the current rate target was appropriate indicating we are not in for hikes any time soon, with Williams stating that “eventually we’ll have rate cuts”. This echoes last week’s FOMC meeting and overall market sentiment, which currently has 2 cuts priced in for the year.

Three ECB policymakers said the ECB was more confident about cutting rates, with both Phillip Lane, Boris Vujcic and Gediminas Simkus saying they were confident that inflation was enroute to target. The April PPI gave the same signals as the print showed a 0.4% m/m decline and thus continued to hover around the -8% y/y as it has for the past half year. This indicates no pressure on goods prices from producer prices meaning we should expect core goods inflation to remain subdued in the near term.

Equities: Global equities saw an increase yesterday in a session devoid of major news, making it a relatively quiet session. It is not necessarily disadvantageous when the absence of news is perceived as good news. In other words, the news received during the previous busy weeks may have a positive influence on subsequent weeks, giving investors time to digest and reconsider the cumulative past data. Yesterday’s risk-on session was dominated by small-caps, cyclicals, high-beta, and long momentum, while value and minimum volatility lagged. In the US, the Dow increased by 0.5%, S&P 500 by 1.0%, Nasdaq by 1.2%, and Russell 2000 by 1.2%. Asian equity markets continued to rise this morning, led by South Korea with a 2.4% increase and markedly higher in Japan despite the USDYEN at 154. European futures higher this morning, while US futures are more mixed.

FI: The UK bank holiday left a solid mark on European rates markets resulting in very limited volumes and volatility. Some initial catch up to the US treasury trading on Friday sent yields marginally lower from the start, yet after grinding higher through the day, the 10y German Bund yield ended 2bp lower on the day in what can be characterised as a bull flattening move. There was no significant market news.

FX: We were off to a quiet start to the week with UK markets out due to Spring Bank Holiday yesterday. EUR/USD stabilized around the mid 1.07 mark while NOK gained modestly. EUR/CHF edged higher still recovering from last wee’’s topside inflation surprise. For the SEK, the Riksbank meeting tomorrow is in focus where we see the potential for a move higher on the back of our expectation of an unchanged decision. More broadly however, the Scandies continue to be closely tied to movements in USD rates, where we see the balance of risk for lower rates and hence potential for temporary Scandi strength.

Labour's tanks roll relentlessly across Tory lawns, not pausing a heartbeat to celebrate phenomenal local election results in England. It treated the local polls as a military rehearsal for the general election, with ruthless focus on places that will deliver most seats: that includes the south, as well as the north and Midlands, and the party is heading for Scottish turf too.

But the mesmerising ferocity of blue-on-blue abuse is the current news-making drama. Fighting bare-knuckle over post-election ideology, the Tory right are looking forward to an election defeat as long as one of their own isn't at the helm. Besides, they have Sunak in their grip, while the Mail calls Boris Johnson a “coiled mamba” waiting “to save the Tories from total annihilation”. Mournful one-nationers echo the losing West Midlands mayor Andy Street's dignified call for moderation, unheeded. Sunak can stay or go: Labour relishes either equally.

Before the winded government finds words that make any sense, Labour is out there pummelling them again. The shadow chancellor, Rachel Reeves, delivers a speech on Tuesday to nip any “green shoots” talk in the bud, ahead of the week when the Bank of England's monetary policy committee may signal interest rate cuts soon, and ONS figures show a small rise from recession and April's inflation figures hitting the 2% target.

Reeves is getting in first, pre-empting these results with a torrent of data that may feel far closer to people's real life experience. “Conservatives are gaslighting the British public,” she says. “They say we've turned a corner. But try telling that to the 6.4m households across England and Wales that saw their rent increase or had to re-mortgage in the last 18 months, at an additional £210 a month. Or the 950,000 families whose mortgage deal is due to expire between now and January.” When Sunak says “the plan is working”, she can show the UK is set for the slowest growth in the G7.

This will be the first parliament “where real disposable incomes are going to be lower at the end of it than they were at the beginning”, she says. Had the UK economy grown at the average OECD rate over the past decade, it would be £140bn larger today: “The Tory legacy is a Britain that is poorer.” Her litany of woe points to people worse off, with “economic growth on the floor”, taxes rising, “yet public services in ever deeper crisis”. She lands blow after blow. “By the time of the next election, we can, and should, expect interest rates to be cut, Britain to be out of recession and inflation to have returned to the Bank of England's target,” she says, listing the last threads that Sunak's government hangs by.

But Labour focus groups who are shown ministers' statements on “falling inflation” laugh out loud, with people asking: “Where do they do their shopping?” Told that inflation is falling while they see prices rising “makes them want to throw their butter at the TV”, one Labour aide says. “Except it costs too much.” When Reeves says the Tories are gaslighting voters, that's exactly what they think, when food prices remain 25% higher than two years ago. No “recovery” will bring them back down. People describe the economy as damaged, broken, tanked, even “a pyramid scheme”, their minds firmly made up, as they were in 1997, when living standards were genuinely improving. Average wages will not return to 2008 levels until 2026, says the Resolution Foundation.

Telling people they should feel better when they only feel tightened belts and empty purses adds to political cynicism, as Reeves tries to counter the “they're all the same” mindset. Households are slashing spending, even on basics, with grocery spending up 16% but buying 8% less in volume. Less is spent on appliances, hairdressing, travel, restaurants and recreation and less on culture – music venues and theatres attest to that. That squeeze will not be gone by election time.

Reeves keeps asking that old question, “Do you and your family feel better off than you did 14 years ago? Do our hospitals, our schools and our police work better than 14 years ago?” No wonder the Tories strive to shift the battleground to Rwanda, trans issues or any “wokery” they can drum up. And they get it wrong: a YouGov survey has found that 59% think the government is taking too little action on climate change.

Labour discontents might even be cheered by scares that Starmer is a closet Marxist, as the Telegraph's Camilla Tominey warns Tory defectors not to give “birth to a monster”. Pay no attention to his “banging on about patriotism and the St George flag”, as this “wolf in sheep's clothing” is “no cuddly Blairite”. But some may remember how the same red scare on “demon eyes” Blair back in 1997 failed miserably.

As for Reeves, her attacks on the wretched state of living standards turn that vital question back on her: will people feel better under Labour? In her Mais lecture in March, Reeves laid out her “securonomics” programme, a smaller-scale Bidenomics to kickstart investment for growth. It relies on 1.5m homes to be built after a planning reform “blitz”. Her national wealth fund seeds investment to boost jobs with a “skills revolution” and a “genuine living wage”. Her green prosperity plan still offers £28bn by the second half of the next parliament, and an increase to the windfall tax on oil and gas.

But none of that can quite answer the question. Extreme caution has gained Labour rare public trust on the economy: without that there's no chance of victory. What Reeves does in office is another matter and Labour will need to be bolder than she can say now. That's asking the impatient to take it on trust that she can conjure up enough growth to repair public services and restore incomes. But winning always has to come first.

The Pound to Canadian Dollar exchange rate was relatively steady last week; this despite a host of other Pound-based exchange rates taking a pasting in the wake of a benign Federal Reserve update and softer-than-forecast U.S. jobs report.

This relative stability points to equal measures of GBP and CAD underperformance linked to rising expectations that both the Bank of Canada and Bank of England could cut interest rates as soon as June.

Following Friday's U.S. jobs report, the market brought forward the expected timing of the first Federal Reserve rate cut to September from December. In response, the market also raised expectations for the scale of rate cuts at the BoC and BoE, judging both central banks will feel emboldened to cut with the cover of the big Fed.

This has weighed on both the Pound and Canadian Dollar in equal measure, leaving the cross (GBP/CAD) hovering around its 50-day moving average at 1.7162.

The near-term picture suggests the exchange rate can hover around the 50-day fulcrum, which is also bounded by the 38.2% and 23.6% Fibonacci retracement of the 2024 rally:

The exchange rate nevertheless resides above both the 100-day and 200-day moving averages which suggests a broader uptrend remains intact, and once the current consolidation is complete we would look for further gains to the 2024 highs at 1.7350 (a multi-week target).

But be aware that this week sees the Bank of England deliver its latest decision and there are risks the central bank signals it is ready to cut in June, which would lead to a further readjustment in financial markets and a weaker Pound..

"The pound is susceptible to BOE risks into the May 9 meeting," says a note from the foreign exchange strategy team at Barclays. "The MPC is gradually pivoting more dovish, as evidenced by Ramsden's recent speech but also more measured statements by Governor Bailey at the IMF meetings."

A clearly 'dovish' outcome for the Pound would involve the Bank pointing to a June rate cut, as this would involve a significant amount of repricing in financial markets. Such pointers could come in the form of more than one vote on the MPC for an immediate rate cut. The statement could also signal such intentions, as would a downgrade in the Bank's inflation forecasts.

When we consider an upside scenario for Sterling, we imagine it would involve the Bank being at pains to signal that nothing much has changed and that while it is pleased with progress on inflation, it remains guarded.

This could solidify expectations for an August rate cut. Here we would imagine the Pound recovers, with the scale of any recovery depending on how deep this current immediate-term selloff extends.

Any outcome that the market considers 'hawkish' could allow Pound-Canadian Dollar a shot at breaking the 23.6% Fibonacci level at 1.7212, the first hurdle in the quest for fresh 2024 highs.

European shares hit a more-than-one-month high on Tuesday, as a slew of positive corporate earnings, including from Switzerland's UBS and Italy's UniCredit, added to the upbeat sentiment surrounding interest rate cuts.

The pan-European STOXX 600 (.STOXX) was up 0.4%, as of 0805 GMT -- after closing at a one-week high on Monday -- fuelled by increased bets of rate cuts by the Federal Reserve and the European Central Bank this year.

"It is also that the ECB and the BoE will start cutting rates sooner, and irrespective of the Fed. ECB has already indicated that the first rate cut will likely be in June," wrote Mohit Kumar, Jefferies' chief economist in Europe.

"We are still looking for around 0.5% (economic) growth for Europe and the UK for 2024."

Some of that will hinge on the euro zone's retail sales data, due later in the day, especially after data showed German exports rebounded in March but disappointing industrial orders dashed hopes for a swift economic recovery.

Among headlining stocks, UBS (UBSG.S) jumped 8% after the lender's first quarterly profit since taking over Credit Suisse was three times analysts' expectations.

The financial services index (.SXFP) climbed 2.2% to a three-week high, leading sectoral gains.

UniCredit (CRDI.MI), Italy's second-largest bank, gained 3.1% to a 13-year peak, steering the banks index (.SX7E) 1% higher, as it raised its investor reward guidance after posting a much higher-than-expected profit and boosting capital levels.

The retail sub-index (.SXRP) also rose 1.3% as Germany's Zalando (ZALG.DE) gained 6.9% after delivering a better-than-expected first-quarter operating profit.

German chip manufacturer Infineon (IFXGn.DE) climbed 7.1% after better-than-expected second-quarter sales, with analysts expecting long-term growth despite a full-year guidance cut.

Further, spirits makers Remy Cointreau (RCOP.PA) and Pernod Ricard (PERP.PA) jumped 6.1% and 2.6%, respectively, after Chinese President Xi Jinping's "open attitude" towards a trade dispute over French cognac.

On the flip side, German software developer TeamViewer (TMV.DE) dropped 8.6% after a first-quarter results miss.

Danish medical equipment maker Coloplast (COLOb.CO) dropped 5.1% after a second-quarter earnings miss.

German health technology company Siemens Healthineers (SHLG.DE) lost 4.6% following a second-quarter revenue growth miss, with its China revenue declining by 14%.

Germany's Fresenius Medical Care (FMEG.DE) shed 6.5% after only maintaining its 2024 profit outlook despite a first-quarter operating earnings beat.

Elsewhere, Britain's FTSE 100 (.FTSE) hit a record high, up 0.9%, boosted by a 1.5% gain in Shell after Reuters reported its plans to sell the Malaysian gas station business.

European natural gas prices saw a fair amount of volatility in April. TTF front-month futures traded from a little over EUR25/MWh at the start of April to almost EUR34/MWh mid-month, only to fall back below EUR30/MWh by the end of the month. However, prices yet again rallied in early May. Reduced Norwegian gas flows to Europe, and a late cold spell across large parts of the continent increased heating demand over the second half of April.

Gas storage had been flat in Europe for several weeks at 62% full (although that's increased to 64% more recently). As a result, storage has gone from seasonal record highs at the start of April to being more aligned with levels seen in 2020 at the end of April. While the pace of inventory builds has been below normal for the second half of April, we think Europe will hit 100% full storage ahead of the start of the next heating season. This should keep downward pressure on prices, and we still expect TTF to average EUR25/MWh for the remainder of the injection season.

At the end of April, European storage stood at 62% full. This is above the 5-year average of 47% and the 60% full seen at the same stage last year. Europe only needs net injections averaging a little more than 210mcm/day between 1 May and 31 October to see storage 100% full by 1 November. This should be achievable for the region when you consider that since 2018, the only time there has been a lower average net injection was in 2020, largely driven by Covid. Also, dynamics have changed in the European market following the Russia/Ukraine war. However, even if we assume net injections are similar to those in 2020, European storage will reach a little more than 95% full by 1 November, which is still above the European Commission’s target of having storage 90% full by this date.

That said, the strength of injections over the summer will depend partly on how strong a demand recovery occurs in the months ahead. Not only has weaker industrial demand weighed on gas consumption, but demand from the power sector has also been weaker due to stronger renewables output. Our balance assumes a 5% YoY increase in EU natural gas demand in 2024, and this increase still sees the region hitting full storage ahead of next winter.

In aggregate, natural gas flows into the EU were largely unchanged in April compared to the previous month at around 24bcm. However, while overall import volumes were unchanged, there were shifts in specific flows. LNG send-outs, Norwegian pipeline flows, Russian pipeline volumes, and Azerbaijani flows all fell over the month. Stronger flows from the UK and North Africa offset these lower volumes.

Lower LNG volumes should not be a surprise. Asia is a more attractive market for spot cargoes due to Asian prices trading at a premium to the European market for much of the year. Asian demand has been strong so far this year, with lower prices attracting price-sensitive buyers back into the market.

Norwegian flows have been lower due to several outages in Norway, which have continued into early May.

As for the UK, the EU was a small net gas exporter to the UK in March, however, this reversed in April with TTF moving from a discount to NBP to a premium. Limited storage in the UK suggests that the EU will remain a net importer of gas from the UK over much of the injection season.

US storage very comfortable

US natural gas storage has become increasingly more comfortable over the 2023/24 winter. Ahead of the heating season, storage in the US was almost 6% higher YoY and close to 5% above the 5-year average. However, storage is now 21% higher YoY and 35% above the 5-year average. This shift in storage helps to explain the significant weakness in Henry Hub over the winter months.

Several factors have contributed to lower-than-usual stock draws. Firstly, demand was weaker over the winter months due to milder weather. Residential and commercial demand between November and March averaged a little under 35bcf/day, down 6% YoY. Secondly, there was stronger supply over the period, with domestic output growing 3% YoY to almost 105bcf/d. Finally, maintenance at the Freeport LNG export facility would have also reduced demand for gas, reflected in the lower gas flows to the plant in recent months.

Flat US supply growth

The supply growth seen over 2023 and the winter months is not expected to last through 2024. The low-price environment has led to falling drilling activity. Baker Hughes data shows that the US gas rig count has declined 28% YoY to 102 rigs, the lowest count since December 2021. As a result, US dry gas production growth is expected to be largely flat over the year. The EIA forecasts dry gas production to fall 0.2% YoY to 103.6bcf/d in 2024.

Complicating the supply outlook is the growth in associated gas production, which is gas supply from oil wells. The oil rig count has held up better than gas, and stronger oil prices are still supporting drilling activity. Baker Hughes data shows the oil rig count has been steady since October last year. US crude oil supply is also expected to grow modestly in 2024. But if this surprises to the upside (like in 2023), there is potential for further growth in natural gas supply.

US gas demand to strengthen

Flat supply this year is expected to be accompanied by stronger demand. Firstly, lower prices in the US should support demand from the power sector. Secondly, Freeport should return in May from extended maintenance, and we should see gas demand from the plant return to more normal levels.

Furthermore, there is a large amount of new LNG export capacity starting this year. Plaquemines Phase 1 and Corpus Christi Stage 3 are expected to start over the second half of 2024, and these two projects have a combined capacity of a little over 2.6bcf/d (20mtpa). Further capacity is set to start in 2025, with Golden Pass trains 1 and 2 expected to ramp up operations. These trains have a combined capacity of 1.35bcf/day (10.4mtpa). However, there have been reports more recently that delays could push the start date of this plant into the second half of the year.

Asian LNG demand remains robust

The broader weakness in the global gas and LNG market has seen more price-sensitive buyers in Asia returning after the high price and volatile environment in 2022 and parts of 2023. The region saw imports in the first quarter of 2024 grow 8% YoY, and this growth has only strengthened into the second quarter, with imports in April up 17% YoY, according to LSEG data. These stronger flows are expected to continue due to the lower price environment, warmer weather across large parts of southeast Asia, and new LNG importers entering the market (with the startup of new regasification capacity).

The Reserve Bank of Australia (RBA) board has voted to keep interest rates on hold at 4.35 per cent again in its final update before next week's federal budget.

The bank did not rule out further increases and said the "process of returning inflation to target is unlikely to be smooth".

While the RBA still expects to have inflation back within its target range of 2-3 per cent by December 2025, in the near term, price pressures are proving harder to budge.

It indicated high petrol prices and a tight jobs market could further increase inflation.

"Recent information indicates that inflation continues to moderate, but is declining more slowly than expected," the bank said in its statement on Tuesday following the board meeting.

"Underlying inflation was higher than headline inflation and declined by less. This was due in large part to services inflation, which remains high and is moderating only gradually."

Heading into the two-day meeting, analysts broadly agreed the central bank would be leaving interest rates at 4.35 per cent — where they have been since November.

IG market analyst Tony Sycamore said the probability of a rate rise of 0.25 per cent by August has fallen to around 25 per cent.

He said much hoped-for rate cuts could come in November, but "given the RBA's heightened sensitivity to the incoming data the market will seek further insights into the economy's trajectory and inflation from key data ahead of the next RBA meeting on June 18th".

This includes waiting for Consumer Price Index figures and the Federal Budget.

"While we view the bar to another RBA rate hike as very high, we acknowledge the window for rate cuts in 2024 has narrowed and have pushed back our call for a first RBA rate cut from August until November."

The four major banks (Commonwealth Bank, Westpac, ANZ and NAB) have predicted that rate rises have peaked and all bar ANZ have predicted they will lower to 3.10 per cent by November 2025.

Economists and Opposition politicians have cautioned that a big spending budget could increase inflation, which is taking longer than expected to come down and is one of the reasons interest rates have not been lowered.

KPMG chief economist Brendan Rynne said a budget in "expansion mode" would be the biggest threat to inflation taking off again.

He said government spending as a total of GDP was too high, running at around 27 per cent compared to the pre-pandemic average of around 24 per cent.

"What we really need now is for the federal budget not to add to aggregate demand – it should be neutral, or if possible, even slightly contractionary," he said.

Opposition Treasury spokesperson Angus Taylor said the government needed to "contain its addiction to spending" or risk inflation staying higher for longer.

Yet Treasurer Jim Chalmers said both "scorched earth austerity" and "free-for-all-spending" needed to be avoided, noting that the economy was also dealing with slowing growth as well as persistent inflation.

Steve Mickenbecker, Canstar's finance expert, said if borrowers opt to wait for the Reserve Bank to cut the cash rate and lenders to follow suit, they could be facing thousands of dollars in additional repayments and interest.

"Seizing the opportunity to switch now could result in considerable savings, especially with the first forecasted rate cut in November.

"By refinancing now, borrowers can lock away savings over the next six months or so if the cash rate cut comes in line with expectations of the big four banks in November, and then double dip when rates eventually fall. It's hard to flaw this approach."

Commenting on the outlook for rate relief, Mickenbecker said: "Uncertainties still loom with stronger than expected inflation, impending tax cuts and undisclosed cost of living relief in the federal budget that could potentially prolong the wait for rate relief into next year."