Watch out for final April inflation expectations

In focus today

• The week concludes with a light macro schedule, where we keep an eye on the University of Michigan's revised April consumer sentiment survey. The preliminary data showed yet another worrying uptick in inflation expectations.

Economic and market news

What happened overnight

In Japan, Tokyo inflation for April came in higher than expected, with the headline at 3.5% y/y (prior: 2.9%) and core at 3.4% y/y (cons: 3.2%, prior: 2.4%), driven by a broad-based uptick in prices. April marks the start of a new fiscal year, a time when firms reassess their price-setting, and this year's increases were higher than expected, as firms are passing on rising input costs to consumers. Combined with the strong wage growth ahead, we expect the BoJ to continue its policy normalization path - though this remains contingent of the trade war. Also addressing the risks of US tariffs, BoJ Governor Ueda stated yesterday that the BoJ will continue its hiking cycle if underlying inflation converges toward the 2% target, but the impact of US tariffs could change that course.

What happened yesterday

In the US, March durable goods orders was much stronger than expected at 9.2% m/m SA (cons: 2.0%). The figures were clearly affected by front-loading, as orders of primary metals and cars have ticked higher in early 2025. Looking at details, the largest uptick occurred in non-defence aircraft orders at 149% y/y, mostly reflecting a strong increase in Boeing's order books, since excluding aircraft, new orders hardly increased at all. As the uptick mainly reflects temporary factors, the market impact was muted.

Several Fed speakers were on the wire yesterday. Cleveland Fed President (hawk and non-voting member) unsurprisingly struck a hawkish tone, emphasizing that the Fed should be patient rather than pre-emptive in assessing how tariffs will impact inflation and growth. Fed Governor Waller (dove and voting member), conversely, conveyed a dovish tone, noting that it would not be surprising to see more layoffs and higher unemployment. Minneapolis Fed President Kashkari (hawk and non-voting member) expressed concern that the trade policy made him "nervous" about potential large-scale layoffs, though so far, he has only heard about businesses beginning to plan for this scenario if trade uncertainty persists. Importantly, the blackout period ahead of the May meeting begins on Saturday. The Fed staying put is seemingly a done deal, unless Trump somehow causes some renewed chaos in markets before the meeting. We maintain our call for the next cut in June and expect quarterly 25bp reductions until the policy rate reaches a terminal range of 3.00-3.25% by mid-2026.

In the US-China trade war, Beijing yesterday played some of their cards, stating that the US should cancel all "unilateral tariff measures" against China "if it truly wanted" to resolve the trade war. Currently, no economic and trade negotiations between the two countries have taken place, despite the US frequently mentioning de-escalation in recent days.

Firms also appear to be factoring in the ongoing trade war between the US and China, as reflected by Apple's plan to relocate the production of iPhones sold in the US from China to India as soon as next year, according to the Financial Times this morning.

In Germany, the Ifo index for April was surprisingly positive, not really impacted by tariffs, as was expected. The assessment of the current economic situation rose to 86.4 in contrast to an expected decline (cons: 85.4, prior: 85.7). Interestingly, the expectations component declined only marginally to 87.4, much less than expected (cons: 85.0, prior: 87.7). Hence, like the PMI data, the Ifo index did not really show an abrupt impact of the Trump trade war. Details show that the smaller-than-expected decline in expectations was due to construction expectations rising, services remaining unchanged, and manufacturing expectations declining. Hence, the manufacturing leg was marginally impacted by the trade war, while the construction expectations ticked higher most likely due to the infrastructure package.

Equities: Equity markets continued their upward trajectory yesterday, consistent with the pattern observed in recent sessions. Once again, US equities led the gains, with cyclical stocks outperforming, supported by declining implied and realised volatility. As US cyclicals, growth, and tech stocks outperformed, we also saw significant underperformance in minimum-volatility stocks. The investment narrative remains relatively straightforward at present. Macro and micro data are taking a back seat, with market focus squarely on whether the US continues to escalate - or de-escalate - the trade conflict. Yesterday brought further signals from the US administration pointing towards de-escalation. In the US yesterday, Dow +1.2%, S&P 500 +2.0%, Nasdaq +2.7% and Russell 2000 +2.0%. Asian equity markets are broadly in the green this morning, supported by initial signs from China suggesting a softening stance, not further escalation. Reports indicate that China is considering exempting certain product categories from the steep 125% tariffs currently imposed on US imports. Futures in both Europe and the US are also trading higher this morning, with US futures driven by positive earnings after the close yesterday.

FI & FX: Rates rallied, both in the US and Europe, during yesterday's trading session. The USD weakened somewhat against the EUR yesterday but regained all back in today's morning session. Rumours that China might suspend the elevated tariffs on some of the US goods imports, lifts Chinese sentiment this morning. A rather empty macro-agenda makes lacks any triggers for big movements, and focus will be on any (geo)political comments that might come during the day.