Sunset Market Commentary

Markets

It’s a hard time these days for (economic) analysts and central bankers alike. Their assessment on the current state and the outlook for the economy is conditional to the (until now) unpredictable extent and outcome of the conflict in the Middle East. Hard data often/mostly are outdated at the time of publication. The monthly PMI surveys (and ISM’s in the US) in this context probably provide one of the better, more or less timely pointers on the reaction of a key group of economic agents, the purchasing managers. The outcome of the April EMU PMI was ‘as feared’. The EMU economy is heading toward stagflation. First, the ‘least worse part of the story’. The overall composite PMI declined more than expected from 50.7 to 48.6, the first sub-50 reading, separating growth from contraction, since December 2024, due to a sharp contraction in activity in the (mostly domestic) services sector (47.7). S&P global analyses that the decline in output was broad-based across the region. Interestingly (surprisingly?), activity in the manufacturing sector even improved (52.2 from 51.6, best level in 47 months). However, there is a ‘but’. ‘Some of the upturn reflected reports of customers seeking to secure purchases amid concerns over price rises and supply shortages’. In this respect, manufacturers also see suppliers’ delivery times lengthen to the greatest extent since mid-2022. S&P calculated that the decline signals a 0.1% quarterly rate of GDP contraction at the start of Q2. For now the negative impact on employment was limited. Still, overall confidence on the year-ahead outlook, still at a 21 month high in February, in April dropped to lowest since end 2022. The picture regarding growth was far from inspiring. The story on prices is even more worrisome. Both input costs and output prices are rising at the sharpest rates in more than three years. S&P even sees the biggest surge in cost pressures since 2000 if one excludes Covid pandemic era. The rise in costs is also not only due to higher energy prices, but due a wider rise in commodity prices and a growing supply-demand mismatch.

The ‘one million dollar question’ of course is what this means of ECB policy. EMU yields this morning initially added a few bps with Brent oil north of the $100 barrier also adding to the inflationary woes, but for now there is no follow-through price action. EMU swap yields are little changed in a daily perspective. Even so, after reducing ECB rate hike expectations to 1 ½ 25 bps steps by year end on Friday, EMU money markets currently again see a near 90% chance of a June rate hike and more than one additional step by year end. US yields show similar small ‘changes’. US weekly jobless claims rose a slightly higher than expected 214k, but remain at a benign level. The US manufacturing PMI released at the time of finishing this report even improved (composite 52 from 50.3), but with little market impact. After recent rally, gains in (US) equities stall as headlines on the Iran conflict remains highly confusing (S&P 500 and Eurostoxx 50 ceding 0.1%). The dollar ‘enjoys’ a (still modest) safe haven bid (DXY 98.7, EUR/USD 1.169, USD/JPY 159.55).

News & Views

UK activity rose in April with the composite PMI improving to a two-month high of 52, corresponding with a 0.2% quarterly growth rate. This upturn, however, comes with a catch, S&P Global said. It’s reflecting in part a rush to secure purchases ahead of price rises and already-present supply shortages linked to the Iran war. This was most visible in the manufacturing gauge (53.6, 47-month high) but also in services (52, two-month high). Advanced purchasing temporarily lifted industrial orders books while services providers reported fragile demand conditions due to business uncertainty, higher inflationary pressures (transportation costs) and elevated borrowing costs. S&P said these survey details “hint strongly that this [growth] pace cannot be sustained should the crisis persist.” Private sector employment numbers decreased for the 19th month running, be it at the slowest pace since October 2025. Price pressures are strong with manufacturers recording a steep increase in their input prices. Services companies have seen input costs rise at the fastest pace since the survey begin almost 30 years ago on greater fuel costs and wages. This resulted in the sharpest output price increase since February 2023 with both sectors contributing. Optimism for the year ahead fell to its second-weakest since December 2022 on these increasing cost burdens. Despite this ‘better performance’ compared to EMU, UK gilts underperform Bunds with yields rising 1.0 (5-y)-3.5 (30-y) bps. Recent sterling outperformance against the euro slows (EUR/GBP little changed near 0.8665).