European markets closed lower on Wednesday, May 7, 2025, as traders kept a close eye on corporate earnings and awaited the U.S. Federal Reserve's monetary policy announcement. The pan-European Stoxx 600 ended the day down 0.5%, with retail stocks leading the losses, falling by 2.2%. This decline in the retail sector was exacerbated by U.S. President Donald Trump's announcement earlier in the week regarding impending tariffs on the pharmaceuticals sector, which is still reeling from the news.
Shares of Danish pharmaceutical giant Novo Nordisk managed to buck the downward trend, rising 1.3% after the company reported first-quarter earnings that exceeded expectations. However, the firm did cut its 2025 guidance, citing weakening demand for its popular weight-loss drug, Wegovy. Investors also monitored earnings releases from a variety of companies, including Ørsted, Pandora, Veolia, Legrand, BMW, Siemens Healthineers, Fresenius, Skanska B, JD Wetherspoon, Vonovia, Delhaize, and Telecom Italia.
Across the Atlantic, U.S. stocks were largely unchanged as investors awaited the Federal Reserve's interest rate decision, set to be announced at 2 p.m. ET. The S&P 500 and Nasdaq Composite hovered near the flatline, while the Dow Jones Industrial Average rose by 154 points, or 0.4%, buoyed by a surprising 10% surge in Disney shares following a jump in streaming subscribers.
The Fed's interest rate decision is highly anticipated, with market expectations overwhelmingly pointing towards a pause in interest rates. According to CME's FedWatch tool, there is only a 3.1% chance of a rate cut during this meeting. Investors will be listening closely to Fed Chair Jerome Powell's comments following the announcement for insights into the future path of rates and the state of the economy.
Market reactions have been mixed, as the Fed's decision is widely expected to deliver no surprises, with interest rates likely remaining on hold. The market is pricing in a mere single-digit percentage probability of a rate cut at today's meeting. Despite repeated calls for easing from President Trump, who has even suggested the possibility of seeking grounds to dismiss Chairman Powell, the central bank is expected to resist such pressures.
In the context of ongoing trade negotiations, U.S. Treasury Secretary Scott Bessent and top trade official Jamieson Greer are set to meet with their Chinese counterparts this week in Switzerland. This news has been taken as a positive sign for trade developments, following turbulent market reactions after Trump's tariff announcement last month.
Meanwhile, Hong Kong markets surged more than 2% on May 7, 2025, after China's central bank and financial regulators announced plans to cut key interest rates to support growth amid trade concerns. This move is seen as an effort to shore up economic stability in the face of ongoing challenges.
Inflation remains a topic of concern for the Fed, particularly as March inflation figures in the United States registered a notable decline, reaching 2.4% year-on-year—the lowest level since September 2024. This moderation in inflation is largely attributed to falling fuel prices, which have helped temper overall price increases. However, the Fed is expected to remain cautious, as the impact of tariffs on price levels continues to be a significant factor in their decision-making process.
Bloomberg suggests that the forecast for core PCE inflation could be revised upwards to 3.5% for this year during the June meeting, a significant increase from the previous projection of 2.8% made in March. Concurrently, a downward revision of 0.8 percentage points is anticipated for GDP growth forecasts, bringing the expected growth rate down to a mere 0.9% for 2025. This could imply a marked upward adjustment to unemployment rate projections, adding to the Fed's complex dilemma.
The Federal Reserve's own projections indicate two interest rate cuts this year, although this assessment dates back to March. In contrast, the market currently anticipates as many as three rate reductions this year, with July being eyed as a potential timing for the first cut. However, the prevailing inflationary pressures may necessitate a more cautious approach from the Fed.
Gold, traditionally viewed as a safe-haven asset, has experienced significant appreciation amidst the uncertainty surrounding monetary policy. On May 6, 2025, gold reached a record closing price of $3,430 per ounce. Although gold opened higher on May 7, it is currently facing losses due to potential discussions between the U.S. and China regarding the easing of tariffs. A Fed decision to maintain interest rates is typically seen as negative for gold; however, the asset has gained ground during periods of high rates recently. Consequently, heightened volatility in gold prices can be expected following today's Fed announcement.
Currently, key support for gold lies around $3,250 per ounce, coinciding with the 25-period moving average and the largest correction within the multi-month uptrend. As the markets await the Fed's announcement, investors will be keenly observing the implications of the decision on both equities and commodities.
