Politics continue to push sentiment

In focus today

Today we receive the German Ifo index, and it will be interesting to see if it shows the same development as the PMIs yesterday. We particularly look out for the Ifo index as it has an expectations component in contrast to the PMI, which should give a better reflection of the trade war impact.

Economic and market news

What happened yesterday

In the US, against all the gloomy signals from the regional Fed indices, the manufacturing index increased to 50.7 (cons: 49.1, prior: 50.2), while the services measure declined to 51.4 (cons: 52.5, prior: 54.4), though it remains in expansionary territory. The composite PMI ticked lower to 51.2 from 53.5 but still signalled growth. Looking into details, export orders indices weakened across both manufacturing and services, while the domestic side appears surprisingly strong. Services new orders weakened slightly to 52.7 from 53.7, whereas manufacturing new orders actually increased to 51.4 from 51.1. All in all, a surprisingly positive PMI report, providing some support to the USD.

Remarks from the Trump administration weighed on markets again yesterday. Reports emerged that Treasury Secretary Bessent and Commerce Secretary Lutnick were the ones who stopped Trump's intentions of firing Powell. Bessent also added colour to the ongoing trade de-escalation talks with China, noting that a full trade deal could take 2-3 years. He stated that a prerequisite for restarting negotiations is lowering tariffs - currently 145% on Chinese goods and 125% on US goods - but emphasized that Trump is unlikely to make that move unilaterally. Rumours also circulated that the White House might consider cutting tariffs on China to as low as 50%, though a White House official dismissed this, clarifying that any tariff announcements would come directly from Trump. Markets turned slightly more optimistic on the back of potential tariff relief, with the probability of a US-China deal before June rising to around 38%, up from 34% prior to the news.

Furthermore, the Financial Times also reported that Trump is considering exempting carmakers from some tariffs following recent lobbying efforts from US auto manufactures.

In the euro area, as expected, the composite PMI ticked lower to 50.1 in April (cons: 50.2, prior: 50.9). Notably, the downtick was surprisingly entirely driven by the services leg, which fell to 49.7 (cons: 50.5, prior: 51.0), whereas the manufacturing counterpart beat expectations, increasing slightly to 48.7 (cons: 47.4, prior: 48.6). With the services sector edging below the 50-threshold, the print supports the narrative of further easing by the ECB as also price pressures were easing in the report. However, looking at details, services employment is still sound at 50.8, indicating that the decline is not as dire as the headline suggests.

Speaking of the ECB, the latest update of their wage tracker continues to signal lower wage growth in 2025, further underscoring the case for additional monetary easing from the ECB. Looking ahead, we continue to expect the ECB to deliver 25bp cuts at the upcoming meetings, bringing the deposit rate to 1.50% by September 2025.

In the UK, April PMIs surprised sharply to the downside across sectors, showing signs of stagflationary tendencies. The composite measure stood at 48.2 (cons: 50.4, prior: 51.5), with services at 48.9 (cons: 51.5, prior: 52.5) and manufacturing at 44.0 (cons: 44.0, prior: 44.9). Price components ticked higher across the board, with both input and output prices increasing at a faster pace in April, while employment indicators moved further into contractionary territory for both services and manufacturing. Hence the more muted growth outlook and higher price components spells trouble for the BoE.

In commodities, oil prices declined by around 2.0% during yesterday's session following news that several OPEC+ members want the cartel to approve another accelerated oil output increase for June - similar in volume to the one agreed for May. Kazakhstan was also out stating that they are not eager to cut output to make up for previous overproduction. Eight OPEC+ countries will convene on 5 May to agree upon the output plan for June. As we expect downward pressure to persist in Q2, we forecast Brent to average USD70/bbl in Q2 and recover to USD85/bbl in Q4.

Equities: Equities rose again yesterday as optimism around US politics gained traction. We saw significant outperformance of cyclical sectors over defensives - across both US and European markets. From a broader perspective, the new market narrative remains intact: a mix of unusual correlations where the long end of the US curve falls, the USD strengthens, and risk assets outperform. The fact that equities rallied sharply on a day when macro data was at best mixed - and arguably disappointing on the services side - underscores the prevailing sentiment. Earnings yesterday came in solid, adding to the positive tone. US equities yesterday Dow +1.1%, S&P 500 +1.7%, Nasdaq +2.5%, Russell 2000 +1.5%. Looking at markets this morning, Asia is trading in the red and futures in both the US and Europe are pointing lower. This seems consistent with the more cautious political signals emerging after the U.S. close yesterday.

FI & FX: Whereas U.S. Treasury Secretary Scott Bessent acknowledged that the current tariff levels of 145% for good from China is not sustainable, he nonetheless held on to the mission of a rebalancing of us economic relationships with other countries. The extremely positive market sentiment lost somewhat of its steam during the speech. The 10y US treasury bond yield rose by 12bp from the lows just ahead of Bessent's comments to a intraday high of 4.39% a couple hours after Bessent left the stage.