Euro area, US PMIs resilience tested amid trade uncertainty

In focus today

Today's focus turns to euro area PMI data for May. Recent manufacturing data has exceeded expectations, showing minimal trade uncertainty. May's figures might reveal if recent growth was driven by front-loading exports to the US, potentially weakening manufacturing PMI. Meanwhile, services sector growth declined, with April's index at 50.1, a concern as it reflects consumer sentiment rather than tariff impacts.

In the US, May flash PMIs will be released from the US as well, the previous April data remained stronger than feared amid the trade war uncertainty.

Norges Bank will publish the Expectations Survey for Q2. Since the previous round, where inflation expectations had fallen below 2.5%, inflation has been higher than expected and the exchange rate has weakened. In addition, it may seem as if at least some corporates fear that the global trade war will also disrupt value chains and lead to higher inflation in Norway as well, so inflation expectations may have risen.

Overnight, Japan releases April inflation data. The inflation target has been exceeded for three years, driven mainly by food prices, with rice rising 92% over the past year. Tokyo data indicates broader price pressures in April, but a Bank of Japan rate hike is likely delayed until autumn.

Economic and market news

What happened overnight

In the US, the House Rules Committee advanced Trump's 'big, beautiful bill' to the House floor, with a vote set for today. Some Republicans have criticised the bill for lacking sufficient spending cuts, and the non-partisan Congressional Budget Office estimates the bill will increase the US debt by USD 3.8 trillion, reaching USD 36.2 trillion over the next decade.

What happened yesterday 

In the UK, inflation data for April significantly surpassed expectations, with headline inflation at 3.5% y/y (BoE: 3.4%, cons: 3.3%) and services at 5.4% y/y (BoE: 5.0%, cons: 4.8%). This suggests a more cautious approach from the BoE amid stagflationary concerns. Factors like service indexation, energy bills, and seasonal effects complicate assessing underlying price pressures.

Equities: Global equities ended yesterday in the red, down more than 1%, but the real story lies in the cross-asset dynamics continuing to unfold beneath the surface. Once again, we saw US equities underperform in an environment where equities fell while long-end rates rose - especially in the US - and the dollar weakened. Adding to this was a rally in crypto assets, with Bitcoin pushing to new highs despite signs of deteriorating risk appetite. US tech led the downside and yesterday marked the fifth consecutive session where defensive sectors outperformed cyclicals.

Drilling into intraday price action, it once again becomes clear that the market is not macro-driven. Economic releases were sparse, but US bond markets were active: the 20-year Treasury auction, held at 19:00 CET (after the European cash close), came out weaker than expected. Yields moved higher, and equities turned sharply lower at that precise moment. Taking the classic approach from a long-only equity portfolio manager, one would expect banks to perform well in an environment where yields are higher, driven by the long end of the curve. However, that was not the case yesterday, with banks massively underperforming in the US. This is, of course, due to yields rising and curve steepening for all the wrong reasons. Not surprisingly, this also led to a sell-off in small caps. In the US yesterday, Dow -1.9%, S&P 500 -1.6%, Nasdaq -1.4%, Russell 2000 -2.8%. This morning, Asian markets are lower, along with European futures (both as catch-up to the US cash session yesterday). US futures are higher and some calmness now across asset classes.

FI&FX: While rates have come a little lower overnight the most important market development over the last 24 hours has been the bearish steepening of yield curves amid rising US public debt sustainability concerns. In FX space the JPY and CHF have been the primary beneficiaries while EUR/USD notably has been more stable just above 1.13. In the Scandies, both NOK and SEK proved remarkably resilient to the sell-off in risky assets during yesterday's US session and bears monitoring this morning.