German economic sentiment set to face a sharp decline amid tariff turmoil

In focus today

The main data print is the German ZEW Economic Sentiment index for March which is set to release at 11:00 CEST. Consensus expectations are sharply to the downside at only 9.5, presumably due to the ongoing trade war turbulence. In February, the assessment of the current economic situation rose to 51.6 following the surprise in January at 26.0 which followed six months of declines. Current conditions are expected to improve marginally to -86.8 from -87.6 in February.

In Sweden at 8.00 CEST the government will present the spring budget amendment bill. However, most of it has already been revealed with total reforms of SEK11.5bn and where the largest announced proposal centres around an extended tax cut for home renovations. Last month the government announced a large, long-term, increase in defence spending but as the final target of defence spending will not be decided until the NATO summit in June, it will not be included in today's spring bill as we understand it. Hence, we do not expect the budget bill to be a market mover.

In the UK, we get the labour market report for February/March at 08:00 CEST. 

Otherwise today is fairly quiet on the data front, with market participants eying the ongoing 'Tariff Turmoil'.   

Economic and market news

What happened yesterday

In the US, Fed Governor Waller stated, "under large-tariff scenario with significant economic slowdown, I'd favour cutting policy rate sooner and more than previously thought." He (naturally) emphasized uncertainty but still sounded somewhat dovish in his remarks. Waller has often represented the consensus thinking within FOMC in the past. He highlighted that in a high-tariff scenario with average rates at 25% or above, as is just about the case today, the risk of recession would likely outweigh the risk of escalating inflation.

In Sweden, Money Market CPIF came in at 2.2% y/y (1Y) and 2.3% y/y (5Y). Inflation expectations increased slightly and expectations for GDP growth decreased significantly compared to March. This is also our expectations (or at least that the risk for lower growth has increased).

In Finland, the inflation data for March met expectations, with the CPI at 0.5% y/y and 0.0% m/m. This figure includes mortgage payments - which have decreased due to lower interest rates. Excluding these payments the preliminary HICP published earlier at 1.9%, indicated growing purchasing power in the Finnish economy.

In China, March Exports came in very strong at 12.4% y/y overshooting consensus estimates of 4.4% significantly. While the export figures are very strong by themselves, they are difficult to interpret due to the upcoming tariff changes. Exports are expected to decline sharply in April as trade with the US will cease at least in the short run. Importers could be viewing the tariffs as somewhat temporary and will thus postpone imports, while sectors like microchips and electronics may see increased activity. The situation is currently very muddy, making it challenging to decipher the underlying trends for the time being.

Equities: Global equities rose yesterday as further calmness, optimism, and risk appetite came to the investors. A key driver behind the rebound was growing belief that tariff levels may have peaked.

European equities outperformed those in the US, but more interestingly, it was the third consecutive day where defensive stocks outperformed cyclicals.

In the US, the worst-performing sector was consumer discretionary, a clear signal that investors are becoming more discerning - no longer selling indiscriminately but beginning to assess the longer-term implications of the trade war.

Hence, we are also seeing a growing realisation that earnings in certain sectors, mostly cyclicals, will be more impacted by what now looks increasingly like the endgame on tariffs.

In the US yesterday, the Dow rose 0.8%, the S&P 500 rose 0.8%, the Nasdaq rose 0.6%, and the Russell 2000 rose 1.1%.

Looking at Asia this morning, markets are also trading higher, with European futures in positive territory. US futures are marginally lower at the time of writing.

FI&FX: After bottoming near the 1.1300 level, EUR/USD has regained upward momentum, now hovering just below 1.14 as risk sentiment improved amid signs of greater flexibility from the US administration on tariffs. Similarly, NOK and GBP benefited from improving equity markets. European rates took a breather during yesterday's sessions with 2Y swap rates breaking below the 2% mark with calm market sentiment supporting equities across regions. Similarly, US Treasury yields declined amid dovish comments from FOMC's Waller highlighting his sensitivity to changes in employment. Today, keep an eye out for the US April Tax Day - the deadline for filing individual income taxes - which typically marks the largest daily inflows into the Treasury's cash balance of the year.