For US PMI’s markets might look out to what extent they confirm the stagflationary narrative

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US and European bond markets on Friday were captured in technical trading, pondering the recent repositioning. US yields mid last week corrected lower after Fed Chair Powell tried to send some kind of comforting message alongside a dots projection basically pointing to growing stagflationary risks (higher inflation and lower growth this year). Question remains whether this benign neglect from Powell assuming temporary inflationary impact of tariffs should comfort bond investors. The setback in US yields soon found support. In a steepening move, US yields changed between ‐1.5 bps (2‐y) and +3.3 bps (30‐y). German/EMU yields also entered mild correction after the sharp jump in yields in the wake the fiscal U‐turn in Germany and the Re‐arm Europe initiative early this month. The changes to the German constitutional debt break where approved last week. Markets are now in the process of assessing how/how fast this might filter through into the real economy. The German curve on Friday also mildly steepened with the short end declining (2‐y ‐3.9 bps) while the 30‐y added 0.9 bps. After recent European outperformance, US equities also slightly outperformed Europe with the Nasdaq rising 0.52% compared to the EuroStoxx 50 ceding 0.5%. This relative (short‐term) repositioning was also visible in FX markets. DXY closed at 104.1, off the correction lows near 103.2 registered earlier last week. EUR/USD also eased further to finish the week at 1.082, to be compared to a correction top near 1.095 set on Tuesday.

Asian equity markets mostly trade slightly lower to little changed. US futures show further gains. Investors apparently are drawing some comfort from comments (including on Bloomberg) referring to US officials that the ‘reciprocal tariffs’ to be imposed on April 2 might be more targeted/more limited in scope that initially planned. US yields are gaining about 3 bps across the curve this morning. The dollar eases marginally in this tentative risk‐on. (DXY 104.0; EUR/USD 1.084). The yen underperforms after weaker than expected March PMI’s (cf infra). Later today, the focus turns to the EMU and US PMI’s. For the EMU PMI’s, question is how fast the fiscal U‐turn in the region will translate into higher demand for European products and services. At least it should help the forward looking expectations assessment. Even so, the bar from consensus expectations (EMU composite expected at 51.1 from 50.4) isn’t that high. Assuming an ongoing assessment on sticky costs and prices, the PMI’s should help to put a floor under the recent correction in EMU yields. The EMU 2‐y swap yield at 2.25% is already close to what might turn out the bottom of the ECB easing cycle. The EMU 10‐y swap yield (currently 2.665%) might find support at the January top (2.625%). A decent solid PMI also might help to put a floor for the euro (EUR/USD correction). For US PMI’s markets might look out to what extent they confirm the stagflationary narrative. If so, we also expect it to help putting a floor for US yields, especially at a the short end of the curve.

News and views

Japanese PMIs retreated in contraction territory in March with the composite indicator signaling falling private sector activity (48.5) for the first time since October. This was partly due to a fresh fall in services (49.5). Manufacturing output continued to fall, at the fastest pace for a year (48.5). Composite new orders fell slightly amid notably slowing business for services companies and orders falling solidly in manufacturing. Firms noted that strong inflationary pressures had dampened sales and made some customers hesitant. This won’t change soon with the PMIs signaling elevated cost pressures. Sharply rising input costs translated into higher selling prices. Optimism about the future dipped to the lowest since August 2020. “Strong inflation, coupled with concerns over labour shortages, an ageing population, subdued client spending and increased uncertainty over the international trade environment dampened optimism around the outlook.” The Japanese yen faces some moderate selling pressure this morning. USD/JPY is testing the 150 figure, EUR/JPY moves beyond 162. Japanese yields continue to move north (1‐ 2 bps rise across the curve), eying the inflationary message of the PMIs.

France joined a currently still small group of member states that what the EU to use its anti‐coercion tool against the US if president Trump uses tariffs in an unfairly manner which push the bloc into policy changes. The instrument is the EU’s most powerful retaliatory measure which includes amongst others restrictions on trade and services as well as on certain intellectual property rights. But most officials from the European Commission do not want to commit to this “measure of last resort” just yet, at least not until it is clear what April 2 will bring. Trump is then expected to announce reciprocal tariffs but the scope is unclear and still under discussion. The EC recently postponed retaliatory responses to the US metal tariffs to mid‐April to allow for negotiations.

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