Week enters with increasing fears of recession

In focus today

• In the euro area, focus turns to the Sentix investor confidence indicator for April and retail sales for February. Investor confidence rose sharply in March on the back of the German spending package. Following Trump's "Liberation Day" sentiment is expected to take a hit, although it might not be fully reflected in this month's data. Retail sales have been declining over the past couple of months, aligning with falling consumer confidence after a strong rebound in the second half of last year. Despite favourable conditions for increased consumption, such as a robust labour market, rising real wages, and lower interest rates, geopolitical uncertainty is likely dampening current consumer sentiment.

• In Sweden, the Debt Office publishes the outcome for central government debt in March. This year the deviation stands at SEK 4.7bn, indicating a higher net loan requirement than planned. At the same time, deviations are minor compared to potential future changes - such as defence investments. For further insights.

•  Throughout the week, the spotlight remains on the trade war, with potential deals or retaliation plans under scrutiny. The EU is expected to unveil a retaliation proposal on Monday, with a vote scheduled for Wednesday. Moreover, a series of CPI data will be released, culminating in the US CPI on Thursday, following February's reassuring figures. The week concludes with Friday's Michigan consumer sentiment report, where inflation expectations will be pivotal.

Economic and market news

What happened overnight

In the equity and commodities space, White House officials showed no sign of retreating from their tariff plans, leading to a S&P 500 futures drop of over 3%, as recession fears intensified. Fed Funds futures now discount a 50% probability of a 25bp rate cut in May. The dovish turn saw US Treasury yields continue to rally and oil prices slid around 3% to its weakest since 2021, with Brent spot trading in the USD 63-64/barrel range this morning.

What happened Friday and over the weekend

In the US, the Friday's Jobs Report for March revealed a much higher-than expected rise in NFP of 228k. However, revisions shaved off 48k from the previous months, the participation rate rose from 62.4% to 62.5% and the unemployment rate edged slightly up from 4.1% to 4.2%. These elements added some dovish flavours to the hawkish jobs figures. Markets will look for signs of the trade war escalation feeding through to the most exposed sectors (manufacturing, retail, transportation) in the coming months. Recession fears continue to support expectations of a more dovish Fed, with a May cut of 25bp now discounted by a 50% probability in markets. Near-term uncertainty remains high, but the case for a sustainably stronger USD has weakened, potentially shifting long-term EUR/USD driving forces. We now adjust our EUR/USD forecasts, targeting 1.14 in 6M and 12M. 

Following the jobs report, Fed Chair Powell on Friday stressed the Fed's commitment to maintaining anchored inflation expectations amidst ongoing market volatility, while cautioning that it was still too soon to determine the appropriate response from the central bank and that the Fed is not in a hurry yet.

In Sweden, the flash inflation data for March surprised to the downside. The CPIF and CPIF excl. Energy came in at 2.3% y/y (cons: 2.8%) and 3.0% y/y (cons: 3.2%), respectively. CPI came in at 0.5% y/y (cons: 0.7%). On Friday, we will receive further inflation details, which will be important for understanding future price developments. We expect the y/y figures to be above target throughout 2025 due to basket effects observed in January, complicating policy decisions for the Riksbank amidst a weak recovery - further challenged by tariffs - potentially justifying further rate cuts.

In China, 34% retaliatory tariffs were announced on Friday, effective 10 April, in response to Trump's 'Liberation Day' tariffs. This move, coupled with restrictions on rare earth mineral exports and an antimonopoly probe into Dupont, marks China's toughest response yet in the ongoing trade wars. China's actions signal its readiness to confront U.S. pressures, while risks of further escalation loom. For more insights, see Research China: Trump's tariff hammer to hit Chinese growth, stocks and CNY lower, 3 April.

Equities: Equities were in free fall for a second day. Losses worsened in the US session, bringing S&P 500 -6% lower in one single day. That is -17% off its February high. If you get flashbacks from March 2020 that is warranted, as it is the worst two-day-period since then. What is striking is that the selloff is still so broad-based: European, US and Nordic equity indices were all down 8-9% for the week. Investors find themselves in the hands of Trump and as no one knows how far he will go investors are running better safe than sorry and selling risk in general. Hence, this is not a selective rotation story yet, but outright derisking. On Friday, it was value cyclicals' turn to take the hit. Banks sold off massively on lower yields, while energy was hit from a double whammy of lower growth expectations and OPEC raising production. Lower rates did not bail the "Mag" 7 names from the selloff this time, but homebuilders and real estate were relative outperformers. One could also note returning risk appetite in bitcoin, up 3%.

Risk-off taken to new extremes this morning with a circuit breaker briefly suspending Japanese trading this morning due to too large sell orders. Asian markets are selling off massively with Hang Seng and Taiwan down 10-12% in a rude awakening after holidays on Friday. Derisking continuing in Western markets are well with US and European futures plunging 3-4% this morning.

FI&FX: The broad dollar index DXY regained some terrain following Friday's stronger-than-expected March jobs report and Powell's comment that the Fed not being in a hurry to cut rates. Risk sentiment continued deteriorating with S&P 500 dropping 6% throughout the session, adding to the now cumulative 17.5% drawdown in the index since mid-February. UST yields moved some 3-4bp lower across the curve, but markets continue to price just 13bp of rate cuts for the May FOMC meeting. Friday featured yet another big drop in Schatz yields (-13bp), while the Bund yield dropped 7bp. ECB is now priced to deliver an additional 75bp of cuts this year. EUR/USD fell 0.8% to 1.096, back below the 1.10 mark, while EUR/NOK and EUR/SEK rose 2.5-3.0%. The oil price (Brent) declined 6% and has lost another 3% this morning to a new 4-year low of USD 63.75/bbl. Overnight, Chinese equities have reacted to the retaliation measures announced on Friday, dropping between 6-10% across indices, US equity futures are down 2-3% and haven currencies (JPY, CHF) are bid.