Weekly focus: Mixed signals from PMIs amid tariff announcements

The PMI reports showed contrasting trends between the US and the euro area in March. In the euro area, manufacturing PMI rose more than expected to 48.7 from 47.6, while the US index declined to 49.8 from 52.7. March marked the first time with the US index below 50 since last year, while the euro area manufacturing output subindex rose above 50 for the first time in two years, giving the first signs of an end to the manufacturing slump in Europe. In the services sector, the US recorded a very strong increase to 54.3 from 51.0 while the index in the euro area declined to 50.4. Hence, the reports sent mixed signals within each of the economies, and thereby likely not changing the views in the central banks much for the upcoming policy decisions.

Consumer confidence continued to slide in the US, with the Conference Board measure declining to 92.9 (cons: 94.0) as economic expectations reached the lowest level since 2013 and inflation expectations moved higher on the back of tariff announcements, like we saw in the Miching survey. Yet, at the same time the perception of labour market conditions remained unchanged, as did intension for major purchases, and the share of Americans planning a vacation even rose. So, while Americans are concerned about the future economic outlook, they are not changing their behaviour, yet it seems.

President Trump announced a 25% tariff increase on imports of foreign-made vehicles as well as car parts, which affects USD 286 bn worth of imports, scheduled to income into effect on April 2nd. Together with the expansion of tariffs on Mexico and Canada, the effective average tariff rate could increase by another 5%-points to around 13%, which would weigh on US GDP by a total of 0.5% according to the tax foundation. The EU is expected to retaliate 1:1 to the US measures which risks a tit-for-tat trade war. For details, see Research US - Trump's 'Liberation Day' - what to expect?, 27 March. 

In the euro area, we received March inflation data for two of the large economies, France and Italy. In both countries, inflation came in lower than expected. French inflation was unchanged at 0.9% y/y (consensus: 1.1% y/y) and Spanish inflation declined to 2.2% y/y (consensus: 2.5% y/y) from 2.9%. The lower-than-expected inflation prints support a rate cut from the ECB in April, which was also reflected in markets, that increased the likelihood of a cut, now pricing -21 bp from -19 before the prints. Based on the country data, we expect euro area inflation on Tuesday to decline to 2.1% y/y from 2.3% y/y.

Besides euro area inflation and Trump's tariff announcements, focus next week turns to the US jobs market report, ISM, and Chinese PMIs. We expect nonfarm payroll growth slowed down to just 110k (from 151k) amid federal layoffs and sharply slowing immigration. Also in the US, we look out for the ISM indexes next week to see if they mimic the PMI report. China releases the official PMI for both manufacturing as well as services for March. Consensus is for a small increase in both indices, but we see a good chance of an even bigger increase based on a strong pick-up in the high-frequency Yicai index, metal prices, as well as the Emerging Industries PMI for March. In Japan, focus turns to the Tankan business survey, where a strong report is a prerequisite for further BoJ hikes.

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