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US core PCE price index, Fed's preferred inflation gauge, came in flat on a monthly basis in March, undershooting expectations of 0.1% mom rise. Headline PCE index was also flat, matched expectations.

On a year-over-year basis, core PCE inflation eased from 3.0% to 2.6%, offering some reassurance that underlying price pressures are gradually moderating. Headline PCE inflation also slowed from 2.7% to 2.3% yoy, slightly above expectation of 2.2%.

Meanwhile, consumers continue to spend. Personal income rose 0.5% mom, outpacing forecasts of 0.6% mom. Spending jumped 0.7% mom above expectation of 0.6% mom, led by solid increases in both goods and services.

Full US Personal Income and Outlays release here.

Markets

Markets faced a difficult task today, navigating through a busy eco calendar. In the end, Q1 US GDP data triggered a temporary bear steepening of the US yield curve pushing yields in a first reaction 1 bp (2-yr) to 10 bps (30-yr) higher. EUR/USD was unnerved while US equity futures suffered the bigger (stagflation) hit, resulting in opening losses of 1% (Dow) to 2% (Nasdaq). Negative risk sentiment seems to be the dominant factor for the remainder of today’s trading session. GDP growth contracted marginally (-0.3% Q/Qa) in line with consensus (-0.2%). Details however showed that the pullback in personal consumption was less than feared (+1.8% Q/Qa vs 1.2%) while gross private investment (+21.9% Q/Qa !!) surged thanks to business outlays for equipment. Inventories also contributed positively (+2.25 ppt to GDP), but the trio of failed to offset the drag from government spending (-1.4% Q/Qa) and especially net exports (subtracting almost 5 ppt from GDP, most on record). Shallow export growth (1.8% Q/Qa) fainted against surging imports (+41.3% Q/Qa), frontrunning the hawkish shift in US trade policy. When extracting volatile swings in inventories and trade, final sales to private domestic purchasers accelerated marginally from 2.9% Q/Qa in Q4 to 3% in Q1. Better than feared domestic demand was complemented by stronger than expected price pressure with the core PCE price index accelerating from 2.6% Q/Q in Q4 to 3.5% Q/Q, the second fastest pace since Q2 2023. The employment cost index stabilized at 0.9% Q/Q. Today’s US GDP release outshadowed slower job growth pace in the ADP employment survey for April (+62k vs +115k expected) and an unaltered quarterly refunding statement by the US Treasury. EMU eco data for now fail to move the needle in market thinking on the future ECB policy rate path (June rate cut and 1.5% policy rate bottom). Even as today’s numbers showed stronger Q1 GDP growth (0.4% Q/Q from 0.2% and vs 0.2% expected). National inflation numbers generally point to upside risks to Friday’s EMU release as well with German inflation rising by 0.5% M/M (vs 0.4%) and both French and Spanish prices up by 0.6% M/M (vs 0.4% and 0.3% expected respectively). Only Italy bucked the trend (+0.5% M/M vs 0.6% consensus). Both stronger growth and higher inflation complicate the ECB’s June forecasting task.

News & Views

The Swiss KOF Economic Institute’s economic barometer pointed at a darkening outlook for the Swiss economy. The barometer declined by a strong 6.1 points in April to 97.1. After an increase in March, the index drops below its medium-term average for the first time this year. Negative developments are reflected in the majority of sub-indicators. In particular, manufacturing experiences a strong setback. Similarly, the bundles for other services and hospitality are under downward pressure. Solely financial and insurance services remains nearly unaltered. Within the producing industry (manufacturing and construction), the sub-indicators for different aspects of business activity all show negative developments, except for the sub-indicators for the stock of finished products. Particularly negatively impacted are the sub-indicators for exports, production activity and the competitive situation. Within manufacturing, the indicators for vehicle and also machinery and equipment, for paper and printing producers as well as for the electrical industry are slowing down most noticeably. After strengthening on safe haven flows to EUR/CHF 0.9225 mid-April, the Swiss franc recently eased modestly but at 0.9375 still is a potential deflationary factor to take into account for SNB policy.

Czech GDP rose by 0.5% Q/Q (+2% Y/Y), mainly driven by household final consumption expenditure. Gross capital formation and external demand also had a slightly positive influence. Hungarian GDP contracted by 0.2% Q/Q (-0.4% Y/Y). Polish CPI inflation rose by 0.4% M/M and 4.2% Y/Y (from 4.9% in March). Food prices rose by 0.8% M/M. Prices of electricity and gas (-0.4%) and fuel prices (-1.7%) declined. The further cooling in the Y/Y measure supports the case for the NBP to restart policy easing at the May 6-7 meeting. Even a 50 bps step might be on the cards.

Summary

The U.S. economy is at a greater risk of recession now than it was a month ago, but this 0.3% contraction in Q1 GDP is not the start of one. It reflects instead the sudden change in trade policy that culminated in the biggest drag from net exports in data going back more than a half-century.

Economy Falls into the Trade Gap

The U.S. economy contracted at a 0.3% annualized rate in the first quarter (chart). If you look at this development through the lens of businesses and households trying to get ahead of the tariffs, many of the big pieces of today's report fall into line. For starters, trade lopped 4.8 percentage points off of first quarter growth. It is rare for a drag that large to come from a comparatively small component of GDP such as net exports. In fact, we haven't seen a drag of this size in data going back to the late 1940s (chart). This is not because trade activity was grinding to a halt, but rather because imports shot up as firms tried to pull forward needed industrial supplies and retailers stocked their shelves with consumer goods.

Consumers pulled forward demand somewhat as well with overall PCE growth coming in stronger than expected at 1.8% during the period. That stronger-than-expected outturn exerted a 1.2 percentage point boost to the headline number which kept the contraction in GDP from being a larger one. While it might be handy to point to pre-tariff spending to explain the stronger consumer numbers, that is not an entirely accurate way to characterize what is happening. While monthly auto sales and anecdotal comments from retailers suggest a jump in March spending, most of the strength in PCE was in service outlays which rose 2.4%, much stronger than the 0.5% gain in goods outlays.

In a March report titled April Showers, we previewed some of the economic tumult that was in store for this month, saying that in a climate of uncertainty, April would bring some hard details. On this 30th and final day of the month, the first look at Q1 GDP was more or less right in line with what we described in that preview note when we said that “in anecdotal conversations we’re having with trucking and logistics clients, the rush to get product continued into March...if we see a continued pull-forward in demand, trade could be an even larger drag on first quarter growth.”

The curious thing about today's report, in our view, is that despite the 4.8 percentage point drag from trade, there was only a partial offset (2.3 percentage point boost) from inventories. If firms and retailers were indeed pulling forward needed inputs and consumer goods, it stands to reason that stockpiling would have offered more of a counterweight. We would not be surprised to see the inventory figures revised higher in subsequent releases, perhaps even enough to change this small contraction to small growth.

In other words, cutting through tariff effects are challenging. We often look to real final sales to domestic private purchasers for a somewhat cleaner measure of underlying domestic demand. This measure rose at an 3.0% annualized pace in Q1, suggesting a relatively steady pace of growth (chart). Yet still this measure isn't a perfect indication of underlying demand today given consumers may have pulled forward some purchases toward the tail-end of the quarter and equipment investment received a jolt, up at a 22.5% annualized pace in Q1, primarily due to a pickup in aircraft shipments.

In a nutshell, tariff disruption introduced a lot of noise into the headline Q1 growth number. The question is for how long consumers and businesses can withstand uncertainty. If Q1 growth was influenced by a pull-forward in demand to get ahead of tariffs, to what extent should we brace for a hangover effect in Q2? Consumer and business optimism has tumbled as fear of inflation and recession permeate the economic environment. The U.S. economy is at a greater risk of recession today than it was even a month ago, but this contraction in GDP is not the start of one.

The U.S. economy contracted by a meager 0.3% quarter-on-quarter (q/q, annualized) in the first quarter – in line with the consensus forecast – but a sharp reversal from Q4-2024's gain of 2.4%.

Consumer spending rose 1.8% q/q, a notable deceleration from Q4's 4.0%. Spending on goods was relatively flat (+0.5% q/q), while services expanded by a healthy 2.4%.

Business investment surged 9.8% q/q, as firms appeared to front-load capital spending ahead of the tariffs taking effect. Equipment spending (+22.5% q/q) accounted for the bulk of the gain, though intellectual property products (+4.1 q/q) registered its strongest gain in a year. Structures investment remained relatively flat.

Residential investment rose by a modest 1.3% q/q, following a gain of 5.5% q/q in Q4. But even with the recent pick-up in activity, housing investment remains over 10% below its 2022 pre-Fed tightening levels.

Government spending contracted by 1.4%, as outlays for both federal defense (-8.0% q/q) and non-defense (-1.0%) declined in Q1. State & local spending rose 0.8% q/q.

International trade was the main culprit weighing on growth. Imports surged by 41.3% q/q, largely owing to a strong gain in goods imports (+50.9% q/q). Meanwhile, exports rose by a more modest 1.8% q/q, resulting in net trade subtracting 4.8 percentage points (pp) from Q1 GDP. Some of the uptick in imports showed up in inventory investment, which added 2.3pp to headline growth.

Final domestic demand slowed, but still expanded by a healthy 2.3% q/q.

Core PCE inflation – the Fed's preferred inflation gauge – rose 3.5% q/q (annualized), an acceleration from Q4's 2.6%.

Key Implications

While the U.S. economy entered 2025 with considerable momentum, the vast policy changes undertaken by the new administration have undermined the growth outlook. The pullback in first quarter GDP was overwhelmingly driven by a sharp widening in the trade deficit, as businesses scrambled to boost inventories ahead of the tariff hikes. There was also evidence of DOGE efforts weighing on growth, with federal spending shaving 0.3pp from Q1 GDP, after largely being a small source of growth in recent years. While private domestic activity held up reasonably well, it's likely the next shoe to drop.

There remains considerable uncertainty on the economic outlook. The administration's on-again-off-again tariff approach has eroded consumer and business confidence, pushed the economic policy uncertainty index to levels not seen since the pandemic and has led to a tightening in financial conditions. While consumer spending for March (released at 10:00 am ET) will show some bounce back following a sluggish start to the year, the rebound will in part be driven by a pull-through of big-ticket purchases ahead of the tariffs. This could very well persist into April, though once these effects peter out, consumption is likely to hit a wall. Fixed investment is also at risk of drying up amidst the persistent tariff policy uncertainty, suggesting a more meaningful slowdown in domestic activity is likely on deck over the coming quarters.

Canadian GDP fell by 0.2% month-on-month (m/m) in February, unwinding part of the strong gain the month prior. The reading was a touch softer than Statistics Canada and consensus expectations for flat growth. For March, Statistics Canada's flash guidance points to modest GDP growth of 0.1% m/m.

February's reading was broad-based, with output contracting in 12 of 20 industries. Growth in goods industries contributed most to the decline (-0.6% m/m), while the services sector edged lower by a smaller 0.1% m/m.

On the goods side, mining/quarrying/oil & gas (-2.5% m/m) contributed most to the drop in February GDP. A 0.9% m/m decline in residential building construction pulled the overall construction sector down for the first time in four months. Modest growth in utilities (0.8% m/m) and manufacturing (0.6% m/m) provided a positive counterbalance

On the services side, the real estate sector (-0.4% m/m) was the biggest detractor to growth, consistent with slowing homebuying activity in February. The transportation and warehousing sector (-1.1% m/m) also contributed to February's GDP decline, impacted by major snowstorms in the month. Elsewhere, the finance and insurance sector (+0.7% m/m) grew for a third consecutive month.

Key Implications

The economic momentum that carried into the early stages of 2025 is starting to wane. With the information we have at hand, Q1-2025 growth is tracking around 1.5%, a few ticks below the Bank of Canada's April MPR projections. Past this, the outlook is turbulent, with clear downside risks to Canada's economy as the direct impact from tariffs add to the headwinds from plunging sentiment.

Policymakers at the BoC have their work cut out for them. The Bank opted to hold the policy rate steady at 2.75% last meeting, despite appearing reasonably downbeat about economic growth prospects highlighted in their scenario analysis. With Canada's housing market visibly strained, and some rollover in labour markets and consumer spending, we'd expect the BoC to cut its policy rate by 25 bps at their next meeting in June.

Daily Pivots: (S1) 141.92; (P) 142.34; (R1) 142.77; More...

Intraday bias in USD/JPY remains neutral at this point. On the upside, above 144.02 will resume the rebound from 139.87. But near term outlook will stay bearish as long as 38.2% retracement of 158.86 to 139.87 at 147.12 holds. On the downside, firm break of 141.96 will argue that the recovery from 139.87 short term bottom has completed as a corrective move. Retest of 139.87 should then be seen next in this case.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low), with fall from 158.86 as the third leg. Strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8201; (P) 0.8232; (R1) 0.8271; More….

USD/CHF is staying in tight range and intraday bias remains neutral. On the upside, above 0.8333 will resume the rebound from 0.8038 short term bottom. But upside should be limited by 38.2% retracement of 0.9200 to 0.8038 at 0.8482. On the downside, below 0.8196 minor support will bring retest of 0.8038. Firm break there will resume larger down trend.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress and met 61.8% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.8079 already. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.8783) holds. Sustained break of 0.8079 will target 100% projection at 0.7382.

Daily Pivots: (S1) 1.3377; (P) 1.3411; (R1) 1.3440; More...

Intraday bias in GBP/USD is turned neutral first with current retreat. On the upside, firm break of 1.3433 key resistance confirm larger up trend resumption. However, break of 1.3232 support will indicate rejection from 1.3433, and bring deeper decline back to 55 D EMA (now at 1.2993) and possibly below.

In the bigger picture, price actions from 1.3433 are seen as a corrective pattern to the up trend from 1.3051 (2022 low). Rise from 1.2099 could either be resuming the up trend, or the second leg of a consolidation pattern. Overall, GBP/USD should target 1.4248 key resistance (2021 high) on break of 1.3433 at a later stage.

Daily Pivots: (S1) 1.1362; (P) 1.1394; (R1) 1.1418; More...

EUR/USD is still bounded in tight range and intraday bias stays neutral. On the downside, break of 1.1306 will extend the correction from 1.1572. But strong support should be seen from 38.2% retracement of 1.0176 to 1.1572 at 1.1039 to contain downside. On the upside, break of 1.1572 will resume larger up trend.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will now remain the favored case as long as 55 W EMA (now at 1.0792) holds.

Risk sentiment soured as US session commenced after data showed the economy unexpectedly contracted in the first quarter. Although the decline was heavily influenced by a surge in imports, which mechanically subtract from GDP calculations, the result still serves as a stark reminder that economic momentum was already faltering even before the full impact of President Donald Trump's reciprocal tariffs in April

The weak GDP print has reignited recession fears, and a downturn may have already begun. This narrative is also supported by poor ADP employment report. Attention now turns squarely to Friday’s non-farm payroll data. A meaningful uptick in the unemployment rate or significant weakness in job creation would ring alarm bells for the administration, investors, and Fed alike. W

In currency markets, the initial reaction has seen a mild shift toward Dollar, which is currently the strongest performer of the day, followed by the Loonie and Swiss Franc. On the other side, Yen, Sterling, and Kiwi are underperforming. However, these rankings remain fluid and may change quickly depending on how risk sentiment evolves in the coming sessions.

Technically, a focus is now on AUD/USD. Break of 0.6343 support, following broader risk aversion, will confirm short term topping at 0.6448. Deeper decline should then be seen to 38.2% retracement of 0.5913 to 0.6448 at 0.6244. Further break there will target 61.8% retracement at 0.6117.

In Europe, at the time of writing, FTSE is down -0.28%. DAX is down -0.37%. CAC is down -0.19%. UK 10-year yield is down -0.035 at 4.446. Germany 10-year yield is down -0.04 at 2.459. Earlier in Asia, Nikkei rose 0.57%. Hong Kong HSI rose 0.51%. China Shanghai SSE fell -0.23%. Singapore Strait Times rose 0.72%. Japan 10-year JGB yield closed flat at 1.315.

US GDP shrinks -0.3% annualized in Q1, price pressures building up

The US economy unexpectedly contracted in the Q1, with GDP shrinking at an annualized rate of -0.3%, marking the first decline since Q2 2022 and falling well short of expectations for modest 0.4% growth.

The surprise contraction was driven by a surge in imports and a pullback in government spending, which more than offset gains in investment, consumer spending, and exports.

Compounding the disappointing headline figure, inflation pressures showed renewed strength. The GDP price index jumped to 3.7% yoy, significantly above the 3.1% yoy forecast and accelerating from 2.3% yoy in Q4.

US ADP jobs rise just 62k in Apr, well below expectations

US ADP private sector employment rose by just 62k in April, sharply missing expectations of a 130k increase and marking a notable slowdown in hiring.

Gains were split between goods-producing industries, which added 26k jobs, and service-providing sectors, which contributed 34k. By establishment size, medium-sized firms led with 40k new jobs, while small and large businesses added 11k and 12k, respectively.

Pay trends were mixed. Job-stayers saw wage growth slow slightly to 4.5% yoy. Job-changers experienced an uptick in pay increases from 6.7% yoy to 6.9% yoy.

ADP Chief Economist Nela Richardson described the tone as one of "unease," as employers balance strong economic signals against growing uncertainty tied to fiscal policy and consumer sentiment.

Canada's GDP contracts -0.2% mom in Feb, weakness broad-based across sectors

Canada's economy unexpectedly shrank by -0.2% mom in February, missing expectations of flat growth, as a broad-based downturn weighed on output.

Goods-producing sectors led the decline with a -0.6% mom drop, particularly from mining, quarrying, and oil and gas extraction, as well as construction.

Sservices sector also edged lower by -0.1% mom, dragged down by transportation, warehousing, and real estate

12 out of 20 industrial sectors posting declines.

Looking ahead, preliminary data suggests a modest rebound of 0.1% mom in March, led by gains in mining, retail trade, and transportation.

Eurozone GDP beats expectation of 0.4% qoq growth, EU up 0.3% qoq

Eurozone GDP expanded by 0.4% qoq in Q1, doubling market expectations of 0.2% and signaling a stronger-than-anticipated start to the year. Across the broader EU, GDP rose by 0.3% qoq.

On a year-on-year basis, seasonally adjusted GDP grew 1.2% in the Eurozone and 1.4% in the EU, matching growth rates from the previous quarter.

Ireland led the regional performance with a sharp 3.2% quarterly increase, followed by Spain and Lithuania with 0.6% growth. Hungary was the only member state to post a quarterly contraction, down -0.2%.

Swiss KOF falls to 97.1, outlook considerably subdued

The Swiss KOF Economic Barometer slumped to 97.1 in April, down sharply from 103.9 and well below the expected 102.0, marking its first drop below the medium-term average this year.

The KOF Swiss Economic Institute noted that the outlook for the Swiss economy is now “considerably subdued,” as broad-based weakness weighed on the indicator.

According to KOF, the sharp deterioration was primarily driven by a significant setback in manufacturing sentiment, with additional pressure seen across the hospitality and broader services sectors. Financial and insurance services were the only areas showing relative stability.

Australia's trimmed mean CPI returns to RBA's target band, services inflation eases further

Australia's headline CPI was unchanged at 2.4% yoy in Q1, above expectations of a slight decline to 2.2% yoy. On a quarterly basis, CPI rose 0.9% qoq, also exceeding forecast of 0.8% qoq.

The closely watched trimmed mean CPI, a core inflation gauge, slowed from 3.3% yoy to 2.9% yoy , falling back within RBA’s 2–3% target range for the first time since 2021, in line with market expectations. However, the quarterly increase of 0.7% qoq was a touch higher than the anticipated 0.6% qoq.

Annual goods inflation accelerated from 0.8% yoy to 1.3% yoy, driven by a notable rebound in electricity prices. Services inflation eased from 4.3% yoy to 3.7% yoy, its lowest since mid-2022, amid broad-based moderation in rent and insurance costs.

NZ ANZ business confidence falls to 49.3, inflation expectations steady

New Zealand's ANZ Business Confidence fell sharply in April, dropping from 57.5 to 49.3. The own activity outlook also edged lower from 48.6 to 47.7.

ANZ noted the decline may reflect growing apprehension over the global economic outlook, particularly uncertainty stemming from the escalating US-China trade war and broader policy unpredictability from the US administration.

Cost expectations three months ahead surged from 74.1 to 77.9, the highest level since September 2023. This contrasts with a slight dip in pricing intentions, which eased from 51.3 to 49.4. Inflation expectations one year out remained largely steady at 2.65%.

Japan’s industrial output slides -1.1% mom on auto weakness

Japan’s industrial production fell by -1.1% mom in March, significantly worse than the anticipated -0.7% mom decline.

According to the Ministry of Economy, Trade and Industry, the sharp drop was led by a -5.9% mom fall in motor vehicle output. Notably, regular passenger car production slipped -4.1% mom due to weaker export demand, while small vehicle output plunged -23.2% mom, reflecting disruptions in auto parts supply chains.

The slump in production comes against the backdrop of rising trade tensions, with US President Donald Trump imposing a 25% tariff on car and truck imports and a sweeping 24% tariff on all Japanese goods, later temporarily reduced to 10%.

Japanese manufacturers surveyed by METI project a recovery ahead, with output expected to rise 1.3% mom in April and 3.9% mom in May. But ministry officials remain cautious. “The environment surrounding production remains highly uncertain,” a METI representative warned, adding that manufacturers are clearly worried about the impact of US tariffs, though no changes to production plans have been formally announced yet.

Also released, retail sales rose 3.1% yoy in March, below expectations of 3.6%. Still, the result marks the 37th consecutive month of gains, indicating that domestic consumption has yet to show significant signs of stress.

China's factory activity slumps on trade conflicts, optimism near record lows

China’s factory activity slumped sharply in April as official NBS Manufacturing PMI dropped from 50.5 to 49.0, its lowest level since December 2023 and below expectations of 49.9. Non-manufacturing PMI also weakened from 50.8 to 50.4.

The decline points to early signs of strain from escalating trade tensions, with NBS citing “sharp changes in the external environment” as a key driver.

Private-sector data painted a similarly cautious picture. Caixin Manufacturing PMI dropped to 50.4, its lowest in three months and just narrowly remaining in expansion.

Caixin's Senior Economist Wang Zhe noted that while production and demand grew modestly, the pace has slowed and forward-looking optimism weakened significantly—plunging to the third-lowest level ever recorded. Trade-related uncertainty was a key concern for firms, weighing heavily on sentiment despite hopes for more policy support.

The April PMIs point to early-stage fallout from the China-US tariff standoff. Businesses are already reporting shrinking employment, delayed logistics, and inventory drawdowns. With both consumer and business confidence faltering, the government faces growing pressure to deploy stimulus measures. Unless domestic demand recovers and external risks subside, China’s economy could face more headwinds in Q2 and beyond.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1362; (P) 1.1394; (R1) 1.1418; More...

EUR/USD is still bounded in tight range and intraday bias stays neutral. On the downside, break of 1.1306 will extend the correction from 1.1572. But strong support should be seen from 38.2% retracement of 1.0176 to 1.1572 at 1.1039 to contain downside. On the upside, break of 1.1572 will resume larger up trend.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will now remain the favored case as long as 55 W EMA (now at 1.0792) holds.