Weekly focus – Cautious optimism

Early, yet still uncertain rumours of de-escalating tariffs between the US and China sparked a cautious rebound in markets' risk appetite. Sources story from the Wall Street Journal suggested that the White House was considering cutting the tariff rate to 50-65% from the current 145%. US Treasury Secretary Scott Bessent affirmed that the current tariffs against China are 'unsustainable' but also that any reductions would have to be agreed mutually. China's foreign ministry denied that the two countries are currently in any negotiations, even if the door for talks is still open. In any case, US equities, Treasuries and the USD recovered ground after the broad-based sell-off over recent weeks.

Markets also found comfort in sources suggesting that Trump decided not to fire Fed Chair Powell after Bessent and Commerce Secretary Howard Lutnick cautioned him against such a move. The FOMC is set to enter a blackout tomorrow ahead of its May meeting, where consensus expects rates to remain on hold. Cleveland Fed's Beth Hammack echoed many of her colleagues yesterday when she said policymakers 'need to be patient' when setting rates in the near-term. FOMC's influential member Christopher Waller was more dovish, as he believed any price increases from tariffs would remain transitory and that the risk of unemployment from tighter profit margins was on the rise. We still expect the Fed to continue cutting rates quarterly from June onwards and until 3.00-3.25%.

While the April flash PMIs were not particularly strong, they were also not as weak as one could have feared based on the recent tariff uncertainty. Notably, the manufacturing indices increased modestly across both the euro area and the US, while the decline in composite indices was mostly due to weaker growth in services activity.

This week we also lifted our 12M EUR/USD forecast all the way to 1.22 in our latest FX Forecast Update - Gravitational forces have shifted for USD - not for Scandies, 23 April. We first shifted the profile higher in early April after Trump's 'Liberation Day' and overall, the past month has marked a profound turnaround in our earlier bullish view on the USD, which we maintained ever since early 2022. In our view, the seismic shift in US politics and the weakening structural growth outlook point towards further USD depreciation not just in the near-term but also looking further ahead.

Next week comes with a lengthy list of key data releases. We think the euro area flash HICP for April will show inflation slowing down to 2.1% y/y (Mar. 2.2%) solely due to lower energy prices. Core inflation will likely remain steady at 2.4%. PMI data from China is due for release on Wednesday, and we look for a modest decline amid the trade war. Bank of Japan will likely maintain its monetary policy unchanged on Thursday, even if domestic factors still point towards further rate hikes at the coming meetings.

We think the US April Jobs Report will show nonfarm payrolls growth slowing down to 130k (Mar. +228k). Tightening labour supply due to slowing immigration will constrain employment growth even if latest weekly data on jobless claims and job postings has remained surprisingly stable despite the tariff uncertainty. We also think US Q1 GDP will contract by -0.1% q/q AR due to front-loading of imports but emphasize that underlying demand has so far remained stronger than the weak headline figure suggests.

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