All eyes on PMIs

In focus today

Today's key events will be the April flash PMIs from the euro area, US and the UK, which likely could give the first glimpse of the impact from tariff uncertainty.

In the euro area, we expect to see a decline in the manufacturing index to 48.2 from 48.6 due to less new orders from the US, while the services figure should remain broadly unchanged at 51.0. In principle, the PMI index should not be affected by sentiment effects, but the risk is that we see a negative impact anyway.

In the US, a similar pattern is likely to emerge, with the manufacturing sector weakening - as suggested by last week's gloomy Philly Fed index. The services PMI should hold up better, unless consumer uncertainty has begun to weigh on consumption, though March retail sales defied this.

Economic and market news

What happened overnight

In Japan, April PMIs were mixed, as the manufacturing leg continued to contract for the tenth straight month, printing 48.5, partly due to concerns over Trump's tariffs. Conversely, the service sector measure ticked up to 52.2, driven by customer demand that led to the strongest increase in sales in three months. Importantly, inflationary pressures remained high across both sectors, with overall input costs rising at the fastest rate in two years - and thus firms raising sales prices. The composite measure re-entered the expansionary territory, increasing to 51.1 from 48.9 in March.

What happened yesterday

In the US, the Richmond Fed Manufacturing index worsened to -13 in April (March: -4), with the shipments component dropping to -17 from -7. Coupled with last week's Philly Fed index, regional Fed manufacturing surveys are pointing towards a clear decline in April so far. Hence, it looks like the front-loading boost to new orders seen in Q1 is shifting towards an uncertainty-driven slowdown.

Politically, Trump altered course yesterday, backing off from his threat to fire Fed Chair Powell, stating: "I have no intention of firing him." This led prediction markets to price in a 13% chance that Powell will leave this year, down from 21% prior to the announcement. Trump's de-escalation also improved market sentiment, sending stocks higher, the USD gaining ground again, and gold prices declining. Before Trump's U-turn, Treasury Secretary Bessent had described the trade war with China as "unsustainable," which initially triggered the rebound in asset prices. Adding to the somewhat softer stance on China, Trump also expressed optimism about a potential trade deal, suggesting it would result in "substantially" lower tariffs on Chinese goods. However, he clarified that the final deal "won't be anywhere near" current tariff rates — though "it won't be zero," he added. Note that Bessent is set to speak later today on the state of the financial system.

In the euro area, consumer confidence declined to -16.7 in April from -14.5 in March, dropping to the lowest level since November 2023 - likely due to Trump's trade war and the sharp declines in equity markets. Notably, the lower confidence readings are yet to translate into hard data - both when looking at similar data from other economies (e.g., US March retail sales) and our own high-frequency data on card transactions in Denmark among Danske Bank private customers. Hence, the weakening in consumer confidence appears to be a Trump effect rather than a reflection of a concrete deterioration in household finances. That said, we do expect the trade war to negatively affect euro area growth over the coming year, though likely not to the extent consumers fear, given the backdrop of low unemployment, rising real incomes, and the ECB's monetary easing, which should help support consumption amid trade uncertainty.

The ECB's quarterly survey of professional forecasters showed slightly higher inflation expectations and lower growth expectation compared to the last release. Tariffs and defence spending were the main factors behind the revisions. However, the revisions were very small, indicating that analysts have not yet turned significantly negative on the euro area economy following Trump's trade war. The survey was conducted between April 1 and April 4, so it likely includes the "liberation day" tariffs but not the clear escalation between the US and China. Hence, we will likely see a further downward revision of the growth forecast in the next update, and we also expect lower inflation forecasts following the marked increase in EUR/USD since April 4.

Tariffs and the trade war remain in the limelight, as reflected by the IMF's downgrade of its 2025 global growth forecast, with notable cuts for the US and China. The downward revision is tied to escalating trade tensions amid sharp US tariff hikes. The IMF currently sees further escalation in tariffs and trade tensions as the major risk, alongside the risk of further tightening in financial conditions.

In Sweden, the LFS unemployment was much stronger than expected, with the seasonally adjusted measure decreasing to 8.1% in March from 8.9% in February. Although the series tends to be extremely volatile the details reveal a solid set of numbers, with employment for the full quarter exceeding our forecasts, while the labour force developed as expected. Hence, the worst is clearly behind us in the labour market - unless the recent tariff and stock market turbulence alters the trajectory ahead.

In geopolitics, both Russia and Ukraine showed some progress toward a peace deal. The Financial Times reported that Putin had offered to halt Russia's invasion at the current front lines, while Zelenskiy stated that Ukraine was ready for talks with Russia once a ceasefire was in place.

In commodities space, oil prices moved higher during yesterday's session, largely spurred by new US sanctions targeting Iranian oil exports and the sentiment improvement following Trump's softer tone on the Fed and Bessent's trade-war comments. Brent trades around 68 USD/bbl as of this morning.

Equities: Global equities moved higher yesterday in what largely appeared to be a reversal of Monday's price action. Equities were up, cyclicals outperformed defensives, and in the cross-asset space, we observed a similar dynamic with falling yields and a stronger dollar.

Although we had a fairly busy earnings calendar, neither the earnings nor the macro data released yesterday stood out in a particularly impressive manner. Once again, politics took centre stage. Notably, comments from US Treasury Secretary Scott Bessent seemed to calm markets and restore risk sentiment as he indicated de-escalation with China, describing the tariff standoff with Beijing as unsustainable. US equities yesterday: Dow +2.7%, S&P 500 +2.5%, Nasdaq +2.7% and Russell 2000 +2.7%. Looking at markets this morning, the positive tone continues with green prints across Asia and higher futures in both Europe and the US.

FI&FX: Markets showed some signs of relief after somewhat softer comments from Trump where he said he had no intention to fire J. Powell and gave some soft remarks with regards to the trade war with China. Today's PMI releases will be the first set of releases capturing 'liberation day' and are therefore expected to be on the weak side, which could be an important input for central banks.