In focus today
In the US, the most important data release for today will be the April CPI. We expect the tariffs to start putting gradual upward pressure on especially core goods prices and look for both headline and core inflation to accelerate to +0.3% m/m SA. NFIB’s Small Business Confidence index is also due for release ahead of the CPI.
In Germany, focus turns to the ZEW index for May. The estimate of the current economic situation has shown a bottom in German activity like hard data on industrial production. It has yet to show a clear rebound, and expectations for future growth declined greatly in April following ‘Liberation Day’. Expectations will likely rebound partly due to the less negative signals on trade barriers from the Trump administration like we saw in the Sentix indicator. Focus will thus centre on whether the current situation has deteriorated due to the tariff uncertainty.
Economic and market news
What happened yesterday
In the trade war, the joint statement from the US-China trade talks announced a successful de-escalation, with tariff reductions exceeding expectations. The US will lower tariffs on Chinese imports from 145% to 30%, while China will reduce duties on US goods from 125% to 10% for an initial 90-day period. Later, news reports added that the agreement does not include reinstating “de minimis” exemptions for low-value e-commerce shipments, and President Trump noted that it does not cover the possible separate tariffs on cars, steel, aluminium, or pharmaceuticals. The cuts will take effect on 14 May, with both nations committed to establishing a mechanism for ongoing discussions on trade relations. The agreement has led to a rally in global stocks, higher yields, and declines in EUR/USD and USD/CNY, indicating risk-on and reduced concerns over a US-driven growth slowdown. Markets now predict only a 10% chance of a Fed rate cut in June, with a 25bp cut expected by September. Read more in US-China Flash: Trade talks succeed in de-escalation, 12 May.
In the US, President Trump signed an executive order aimed at setting price targets for pharmaceutical manufacturers, with provisions for direct consumer purchases, eliminating intermediaries. Should pharmaceutical companies fail to meet government pricing expectations, the administration intends to implement rulemaking to align drug prices with international levels. Potential measures include importing medicines from other developed nations and imposing export restrictions. The President is targeting price reductions of 59% to 90%. That said, the exact details on the planned implementation and whether the measures needed congressional approval remained unclear.
In Denmark, Statistics Denmark reported inflation at 1.5% for April, with lower energy prices and increased travel costs due to Easter timing. Food prices decreased slightly but remain 3.7% higher than last year. Core inflation rose to 1.7%, still below the ECB target, indicating controlled price pressures in Denmark. Despite elevated concerns from Trump’s trade war, these fears may be overstated, as the trade conflict could ultimately lead to lower inflation through decreased global demand and cheaper imports driven by a stronger euro. Although EU tariffs on US goods might counteract these effects, they are unlikely to significantly affect Danish consumers.
Equities: You could almost hear the unwinding off puts and shorts squeezing yesterday, as equities rallied on tariff relief. S&P 500 added 3.3% and Nasdaq a full 4.4%, with indexes rallying into the close. As such, US recovered much of its underperformance, with European equities “only” gaining 1% yesterday and Chinese equities even lower this morning. Defence sold off in Europe, suggesting investors shaved off some of their long positions to buy into US. Sector-wise, this was not a “buy everything” rally but believe it or not, a selective one. Defensives and real estate missed out entirely while cyclical sectors added between 2-5%. VIX closed below the important 20-level, which typically resonates with positioning support for risk parity funds. US futures are retreating somewhat this morning and European futures are little changed.
FI&FX: Yesterday’s session in FX and FI markets was all about the unwind of the post-Liberation Day trades. Rates curves bearish flattened across currencies amid not least short-ends coming higher on markets pricing in less monetary policy easing this year. Credit spreads tightened, Bund-Periphery spreads performed and US Treasury ASW spreads tightened (richer bonds). In FX space the CNY and USD strengthened considerably with EUR/USD falling back to the 1.11 level. Also, CAD and AUD did well while the CEEs, the EUR and JPY where all underperforming. Interestingly, the SEK was caught between opposing forces leaving the trade weighted Krona little changed on the day.
