Anticipating tariffs
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Market update
The S&P 500 closed the week at 5,686.67, +2.92% higher. The Dow Jones closed at 41,317.43, +3.00%, with the Nasdaq higher by +3.42%. The volatility index VIX closed the week at 22.68, down from 24.84. The Euro Stoxx 600 rose +3.07%.
The 10-year UST closed at 4.31%, up from 4.24% a week before. The yield curve is slightly inverted with the yield spread between the 3-month and 10-year UST at -2bps. US Corporate Bond spreads: Investment Grade spreads widened +6bps at 191bps and High Yield spreads widened +4bps at 414bps. German 10-year Bunds yield closed at 2.53% up from 2.47% a week before. In Europe, Corporate Investment Grade spreads widened +4bps at 121bps and High Yield widened +2bps at 404bps.
The US Dollar Index (DXY) appreciated +0.56% last week and closed at 100.03. The Euro closed at 1.1297 (-0.60%); the Yen depreciated -0.90%, closing at 144.96 and the Swiss Franc appreciated +0.17%, closing at 0.827. Gold closed at $3,240.49, depreciating -2.39%. Oil was lower, Brent closed at $61.29 (-8.34%) and WTI at $58.29 (-7.51%).
Macroeconomy
On tariffs
China's Ministry of Commerce said that it's evaluating trade talks with the US. The ministry said this comes as "the US has recently sent messages to China through revenant parties" and urged Washington to show "sincerity" towards China. From the US side, US Trade Representative Greer said there were no officials talks yet with China. On other countries, Greer said “we have deals that are close”. Treasury Secretary Bessent said that they’d had “many countries come forward and present some very good proposals”. President Trump announced some auto tariff relief. The measures prevent tariffs on autos and on steel and aluminum from stacking up on top of each other and provides partial rebates for domestic car makers on imported auto parts for the first two years.
Non-farm payrolls
The US economy added 177k jobs in Apr. according to the Establishment Survey, ahead of consensus at 138k. Private payroll additions were above at 167k (consensus was at 125k, and ADP showed just 62K earlier). Federal government employment declined by 9k in Apr. and is down by 26k since Jan. Revisions were negative, with Mar. and Feb. reduced by ~58k for the Establishment Survey. The Household survey showed a jump in the number of employed people (+436k). The unemployment rate was flat m-o-m and in line with consensus at 4.2%. The participation rate ticked up 10bps m-o-m to 62.5% (as expected). Hourly earnings growth was soft at +0.2% m-o-m (vs. +0.3% estimate) and +3.8% y-o-y (flat vs. Mar. and 10bps below the +3.9% forecast). The workweek length held steady at 34.3 (above consensus of 34.2). The modest uptick in the workweek drove average weekly earnings up 4% y-o-y (vs. average at +3.8%).
US GDP
US real GDP contracted by 0.3% q-o-q annualized in Q1, after growing 2.4% in Q4. This marks the first contraction since Q1 2022. The underlying numbers were quite extreme, with a significant increase in imports and inventories. Net exports were the main drag, subtracting 4.8% from GDP growth, the largest negative contribution on record. A better measure of underlying domestic demand, "core GDP," showed real final sales to private domestic purchasers growing at a 3%, same as in Q4. Goods trade deficit hit a record $162bn in Mar. (vs. $145bn expected).
US data
US ISM manuf. was slightly firmer than expected, decreasing by 0.3ppts to 48.7 in Apr. Major components, including new orders, production, and employment, are now all well into sub-50 territory. There is overwhelming uncertainty due to the volatile tariff policies. The Dallas Fed’s manuf. survey plunged to its lowest level since May 2020. General business activity index was down to -35.8, and the raw materials prices index also moved up to its highest level since mid-2022, at 48.4.
EU GDP
Euro area GDP growth rose by 0.4% q-o-q (1.4% annualized) in Q1, above expectations (+0.2%). Domestic demand and exports contributed positively, with variations across countries. Germany (+0.2%) and France (+0.1%) returned to growth, while Italy's GDP accelerated to +0.3% q-o-q, up from +0.2% in Q4. Spain slowed to 0.6% q-o-q from 0.7% in Q4, still outperforming. Ireland posted stellar growth of 3.2% q-o-q, likely thanks to massive exports of pharmaceutical products in anticipation of potential tariffs. Excluding Ireland, Euro area GDP growth would have been 0.2% q-o-q.
EU inflation
Euro area HICP inflation remained stable at 2.2% y-o-y in Apr. Core inflation rose to 2.7% y-o-y from 2.4% in March. The upside surprise was due to service prices rebounding. Details confirmed that the late timing of Easter was responsible for the increase in core inflation. Services inflation spiked to 3.9% from 3.5% in March. Core goods remained stable at 0.6%. Energy inflation fell to -3.5% from -1.0% in March, while food inflation was broadly stable at 3.0%.
Bank of Japan
The BoJ has kept rates unchanged, in line with expectations. However, the decision had some dovish elements, as their latest forecasts pushed back the likely timing for when they’d reach their inflation target from fiscal 2026 to fiscal 2027.
China data
China April NBS manufacturing PMI was down notably to 49 from 50.5, and new export order was down significantly by 4.3pp to 44.7. Export-oriented sectors were down, e.g., textile, equipment manufacturing, while domestic oriented sectors with government support like high-end manufacturing were still at 51.5. Non-manufacturing PMI was down less, while infrastructure construction PMI was up significantly by 6.4pp reflecting ramping up in government investment.
Highlights
On rates
Sovereign bonds saw selling pressure last week after strong economic data pushed yields higher across the curve. In the US, the 2yr yield rose +7.5bps to 3.82%, after hitting a 6-month low earlier in the week. 10yr yields ended the week at 4.31%, +7.3bps higher. Fed expectations moved in a hawkish direction. The market is pricing in 80bps of incremental cuts this year, significantly less than the 105bps priced in before the labor data release. No rate cuts are expected until the 7/30 meeting where investors anticipate a 25bps cut – next FOMC meeting is expected this coming Wednesday. Bonds also sold off in Europe following the stronger-than-expected April inflation data.
Earnings season
Q1 earnings season is being better-than-feared thanks to solid macro data through much of Q1, significant downgrades at the start of April that then created an easier hurdle to beat, and good numbers from some of the Mag 7. In the US, around 75% of companies that reported beat earnings expectations and the average positive EPS surprise is coming in at 10%. EPS is growing 14% y-o-y driven by strong results in Healthcare, Communication Services, and Tech. In Europe, trends have been less positive due to FX headwinds, with 55% of companies beating expectations. For the Stoxx600 companies that reported, EPS growth is coming in at -3% y-o-y. While Q1 US EPS numbers have been revised up over the last few weeks, consensus expectations for Q2 continue to drift lower. The ‘good news’ in Q1 is primarily backward looking and few companies have yet adjusted guidance downward. This week, key US releases include Palantir, AMD, Walt Disney and Uber. In Europe, earnings from Novo Nordisk, Siemens Energy, AP Moller-Maersk, BMW, AB InBev and Rheinmetall.
What to watch
- Monday: US ISM, PMI
- Tuesday: China Caixin services PMI; Eurozone PMI; France industrial production; Spain unemployment; Swiss CPI
- Wednesday: Eurozone Retail Sales; Germany factory orders; UK PMI; US FOMC
- Thursday: BOE rate decision; Germany industrial production; US jobless claims
- Friday: China trade data; UK industrial production; Italy industrial production; Canada employment data; US Initial Jobless claims