Euro area PMIs falter, as US show robust growth

In focus today

• In the euro area, focus turns to the initial wage growth data for Q1, specifically the ECB's indicator of negotiated wages. We anticipate a significant decline in wage growth from the 4.1% y/y recorded in Q4. This is attributed to reduced actual pressures and the base effect from substantial inflation-compensating one-offs provided to employees in Q1 2024, as indicated by the ECB's wage tracker. 
• In Sweden, Q1 unemployment figures from the Labour Force surveys have shown significant volatility. April data, releasing today, is expected to show an improvement from January's 9.6% to 8.9%, but an increase from March's 8.1%. Employment is expected to decline, reflecting the drop in new vacancies observed in late April.

Economic and market news

What happened overnight

In Japan, core inflation rose to 3.5% y/y, exceeding expectations and reaching its fastest pace in over two years, driven by reduced energy subsidies and rising food prices. Excluding fresh food and fuel costs, the index increased to 3.0% y/y, underscoring the BoJ's predicament of balancing price pressures from persistent food inflation against growing headwinds from Trump's tariffs. 

What happened yesterday  

In the euro area, PMIs came out dovish, with composite dropping below 50 to 49.5, largely due to a disappointing drop in services to 48.9 (cons: 50.3, prior: 50.1). This is concerning, given that services constitute 73% of the economy and have been the primary growth driver in recent years. Meanwhile, manufacturing showed resilience, improving to 49.4, with the output index staying above 50 due to rising domestic and international orders, indicating minimal impact from trade uncertainty.

Similar trends were observed in France and Germany, where services underperformed, recording lower-than-expected figures at 47.7 and 47.2, respectively, while manufacturing remained strong. In Germany, the IFO figures highlighted increased business expectations, with optimism driven by lower interest rates and anticipated large projects, outweighing trade war concerns.

In the US, PMI data showed robust growth, with manufacturing rising to 52.3 (prior: 50.2) and services increasing to 52.3 (prior: 50.8). The manufacturing index benefited from front-loading, while the stockpiling sub-component hit a record-high in May.

The US House, led by Republicans, narrowly passed Trump's tax bill with a 215-214 vote, advancing it to the Senate, where passage may face greater challenges and could take weeks.

In Norway, the Norges Bank Expectations survey aligns with market expectations, showing 2025 wage growth forecasts at 4.4%, matching the central wage norm and Norges Bank's forecast. Notably, wage growth expectations for 2026 remain unchanged at 3.7%, below Norges Bank's forecast of 4.0%. Short-term inflation expectations rise, but the five-year decline eases pressure on Norges Bank. Profitability expectations turn negative indicating weaker sequential growth, yet the employment diffusion index has shown a positive trend.

Equities: Equity markets ended lower yesterday, largely reflecting spillover effects from the weak US session on Wednesday. This meant that the underperformance was most notable in cash markets across Europe, Japan, and broader Asia, whereas US equities managed to hold broadly flat. Given that the US is mostly driven by cyclical sectors, we observed a marginal cyclical outperformance yesterday. Volatility edged slightly lower with the VIX ticking down again, and across asset, we had a modest bid returning to the dollar. Meanwhile, US long-end yields, which had touched 5.15% on the 30-year, eased slightly into the close. In the US yesterday, Dow 0.0%, S&P 500 -0.04%, Nasdaq +0.3%, and Russell 2000 -0.1%. Looking to this morning, Asian equities are mostly higher, with a constructive tone prevailing in both Japan and China despite Japanese inflation data coming out slightly on the high side this morning. Futures markets in Europe and the US are little changed.

FI&FX: US yields initially rose yesterday but staged a reversal from late afternoon with the 10Y UST moving from a peak of 4.62% to 4.52% and the 30Y UST from a peak of 5.15% yesterday to 5.04%, trading sideways overnight. Today is light in terms of Tier 1 data so attention will be on the US Senate where several Republican members have demanded major changes to vote in favour of the tax bill. Despite the reversal in US yields, EURUSD has again moved above the 1.13-mark overnight after touching below 1.1260 yesterday. EURSEK edged somewhat higher yesterday and current level around 10.88 is not significantly misaligned with our short-term fair value. EURNOK remained stable overnight, in the lower part of the 11.50-11.54 interval seen since yesterday.