Growth risks weigh on sentiment

It’s been a roller coaster ride for stocks so far this week. After a strong performance in May, stocks are struggling for direction at the start of June. Trade tensions threatened a sharp sell off on Monday, before news that President Trump and President Xi would speak on the phone helped to ease fears. However, there is a risk off tone to markets this morning, after news that the Dutch governing coalition had collapsed, along with signs of weakness in the world’s two largest economies.

Stocks remain jittery, and it has been an unconvincing start to June so far. The phrase ‘sell in May, and go away’ comes to mind, as the markets continue to face tariff risks. It is hard to see any clear direction for global stock markets until  we learn the outcome from the much-touted phone call between President Trump and President Xi. Geo-economic risks loom large in investor consciousness; market sentiment cannot find an anchor since trade policies remain fluid. Now that the economic data is showing signs of weakness, then this could add to investor risk aversion. A lot is resting on this phone call, which could take place some time this week, and its outcome may help determine where we go next.

Economic data deterioration weighs on sentiment

Signs of economic weakness are also weighing on sentiment this morning. France’s budget deficit widened in April vs. March, and there have been some negative signals about global growth, especially in China and the US. China delivered a negative growth surprise on Tuesday. The Caixin manufacturing PMI fell to 48.3, the lowest level since 2022, as small exporters continue to get stung by Trump’s trade tariffs, despite last month’s trade agreement. The official PMI survey was not as weak as this, which suggests that the timing of the Caixin survey, along with a smaller sample size, could account for some of the weakness. However, it highlights how destructive tariffs are on the manufacturing sector, there are also signs that tariffs are having a major impact on US manufacturing.

The ISM Manufacturing survey in the US was weaker than expected for May. It fell to 48.5, and expectations were for an increase to 49.5. New orders and employment remain weak, while the prices’ paid component is elevated, which raises the specter of stagflation.

OECD blamed global growth downgrade on the US

As economic data trickles in, a picture is starting to emerge of the new economic order. Trump’s tariffs have delivered an economic shock, and the damage could take some time to reverse. The OECD slashed its growth forecast for global GDP growth to 2.9% this year and next, down from 3.1% and 3% respectively. It blamed trade barriers, and tighter financial conditions for the downgrade. Its forecast for US growth was also slashed to 1.6% for this year, and 1.5% for 2026. This is down from its previous forecast of a 2.2% growth rate. The OECD said that weakness in the US, Canada and Mexico is to blame for the downgraded global growth forecast, with smaller downgrades for other countries.

The OECD’s inflation outlook may also spook investors. The OECD revised down its global inflation forecast to 3.6% from 3.8%. However, it revised its inflation forecast for the US to 3.2% for 2025, from 2.8% previously. The OECD also said that there is a risk of US inflation surging to 4% by the end of this year. Since President Trump wants the US to become a manufacturing powerhouse, could the US end up exporting inflation to the rest of the world?

Bond auction relief

For now, inflation and stagflation fears are not weighing on global bond markets. Bond yields are falling today, after Japan’s 10-year bond  auction saw solid demand. This is the first of several auctions that could test investor demand for sovereign debt this week. Japan has an auction of 30-year bonds on Thursday, the UK has a 40-year bond auction later today and the US is selling short term debt throughout this week. In the lead up to the UK’s bond auction, UK Gilts are outperforming across the curve and yields are falling. This suggests that bond vigilantes are out of sight for now, and that the bond market is not expecting any problem in today’s auction.

The UK bond market could also benefit from comments from Catherine Mann. She used to be considered an arch hawk; however, her recent voting record suggests that she is more nuanced than that. In her most recent comments, she said that cutting interest rates at the same time as shrinking the BOE’s balance sheet creates tension, and that she will consider the balance sheet reduction when deciding interest rates in the future. This suggests that Mann could shift to a more dovish stance and may be more inclined to vote for rate cuts in the future, which is positive for UK Gilts.

Payrolls are a key test for markets

Overall, the risk off tone to markets is likely to persist until we get a new driver. Consumer discretionary, tech, financial and industrial sectors in Europe are selling off, while defensive sectors such as consumer staples, utilities and communications are bid this morning. This suggests that fears about the damage US tariffs are doing to global growth is a key theme for investors as we move through this week. It will also focus minds on this week’s US non-farm payrolls report, and we expect risky assets like stocks and commodities to remain sensitive to global economic data.