Weekly focus: Promising macro data drowns in trade war chaos

Danske Research Team Danske Bank A/S

Liberation Day was the dominant theme in markets and the key driver this week. The escalation of the trade war turned out to be more extensive than what was expected by most analysts and priced in by investors. As a result, global equities nosedived with the US deepest in red, yields declined and oil prices took a big hit, not just from the perspectives of a demand shock but also more supply as OPEC+ announced an output hike in May.

Betting markets now price above 50% probability of a US recession in 2025. This is also reflected in the FX market where the fear of recession overshadows the technical USD strengthening from increased tariffs. As a result, EUR/USD traded back above 1.10 for the first time since early October. JPY and CHF were the two natural outperformers.

The reciprocal tariff on EU goods will be 20%. Using estimates from the ECBGLOBAL 2.0 model we estimate that the increase in tariffs will shave off 0.2-0.4 percentage points of euro area GDP in the coming year assuming that recent tariffs are unchanged in the entire period on all countries and there is retaliation. Retaliatory tariffs will of course be inflationary in Europe, but we expect the negative shock to the global economy will offset this, leading to lower prices, if anything. March HICP inflation declined to 2.2% as the underlying price pressure remains largely in line with the inflation target. The labour market still shows no signs of cracking as unemployment hit a new record low of 6.1% despite obvious German weakness. Even if ECB hawks did push back on ECB pricing, we still think conditions are in place for another rate cut in April. No scheduled data has the potential to move that picture much.

US tariffs on China are set to move to 65-70% on average according to our calculations, which will deal a serious hit to Chinese growth. This comes as both official and private PMIs indicate that stimulus is starting to kick in with manufacturing activity picking up in March.

Elsewhere in Asia, sthe Japanese Tankan business survey aimed nicely with Bank of Japan’s cautious hiking cycle as non-manufacturing business conditions hit its highest since 1991. Inflation expectations edged higher on all horizons as the outlook for wage growth this year continues to look strong. A next hike already by the end of the month should be off the table for now, though, with the new tariffs, which will be particularly tough on Japanese car manufacturers.

Next week, we will continue to keep a close eye on the trade war, including potential deals or retaliation plans. The trade war escalation will to some extent be reflected in Euro Sentix, released on Monday and to a larger extent in US consumer sentiment released on Friday, where inflation expectations, which are already sky-high, will take key focus. We also get actual March US inflation data, which follows the comforting February release after a January price spike. Of course, US inflation will attract much attention going forward.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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