Thin Eco Calendar Under Scrutiny Ahead of Tariff Announcement

Market activity remained cautious during European trading sessions yesterday, despite a slight recovery in stock markets. Core bonds performed well as the April EMU Consumer Price Index (CPI) figures provided further support for a potential 25 basis points cut by the European Central Bank (ECB), which would bring the interest rate down to 2.25% on April 17 before signaling a considerable pause.

The latest inflation data presented a mixed picture; while headline and core inflation advanced by 0.6% month-over-month, year-over-year figures slightly dipped to 2.2% (from 2.3%) and 2.4% (from 2.6%). These numbers were generally in line with expectations or marginally below them. The German yield curve experienced a flattening trend, with daily yield changes ranging from -2.6 basis points for the 2-year bond to -6.1 basis points for the 30-year bond. The 10-year German yield tested its technical support level at 2.65% for the second consecutive day.

In the United States, initial data releases prompted a move towards a risk-off sentiment, although this was quickly countered. The US manufacturing ISM index fell back into contraction territory, registering 49, down from 50.3 and below the expected 49.5. The details indicated signs of stagflation as new orders contracted further to 45.2 (from 48.6) and job losses accelerated to 44.7 (from 47.6), coupled with rising price pressures noted in the prices paid index which jumped to 69.4 from 62.4. This situation portrays a challenging landscape for the US to regain its status as a global manufacturing leader.

Additionally, the JOLTS job openings in the US decreased more than anticipated, at 7.57 million compared to 7.76 million, but remained relatively stable within the 7 to 8 million range for the past year. Meanwhile, the US yield curve mirrored the European trend of flattening; yields concluded the day 0.2 basis points lower for the 2-year bond and down to 4.7 basis points for the 30-year bond. Both European and US equity markets posted slight rebounds, fluctuating around the 1% mark. The EUR/USD exchange rate remained stagnant around the 1.08 level.

Looking ahead, today’s economic calendar is rather sparse, focusing mainly on the US ADP employment change report. However, the momentous tariff announcement by the White House is dominating market attention, expected between 9 and 10 pm CET, with immediate tariff implementation anticipated. Traders are likely to adopt a wait-and-see strategy. From a market perspective, a scenario where higher tariff levels are broadly applied could ultimately benefit the market narrative in the mid to long term by minimizing new uncertainties associated with incremental tariff increases. High tariffs could potentially shift market sentiment towards optimism regarding the easing of protectionist measures following successful inter-country negotiations.

Although immediate market reactions could be unfavorable, especially for long-term bonds susceptible to selling pressure due to short-term inflation implications, we maintain our long-term bearish stance on curve steepeners. In foreign exchange markets, the ongoing stagflation narrative in the US seems to be working against the dollar’s strength.

Global Economic Updates

In contrast, South Korean inflation unexpectedly accelerated in March, with headline inflation rising by 0.2% month-over-month and 2.1% year-over-year, contrary to expectations of a decline to 1.9%. Core inflation, excluding food and energy, also moved slightly higher to 1.9% from 1.8%. Food prices serve as a significant contributor to this acceleration, registering a monthly rise of 0.6% and a yearly increase of 2.4%. Other sectors such as education and hospitality also noted price hikes, while transportation costs fell by 0.4% month-over-month. Given these inflationary trends, it is plausible for the Bank of Korea to adopt a cautious approach during their upcoming assessments.

In Mexico, the government has revised its growth forecast downward for the current year, adjusting it to a range of 1.5% to 2.3% from a previous estimate of 2% to 3%. The revision is attributed to uncertainties in the economy, subdued residential investments, and supply chain shocks affecting economic performance. Business caution largely driven by US trade policies underscores this outlook, although the government's estimate remains decidedly more optimistic than those from private sector analysts and the central bank, which sees growth in 2025 plummeting to 0.6%. The inflation forecast for Mexico stands at 3.5% by year-end, with expectations to meet the central bank's target of 3% (+/- 1%) the following year.

markets, economy, inflation