This week concludes with US consumer sentiment

In focus today

In the US, we await the preliminary May consumer sentiment survey from University of Michigan, which will provide markets with the latest sense of how consumers are feeling after the tariffs took effect. Earlier surveys have shown a sharp deterioration in future expectations and rapid upticks in inflation expectations.   

In the euro area, the European Commission had scheduled to publish its spring economic forecast today, but the publication has been rescheduled for Monday following the trade war de-escalation between the US and China.

In China, early Monday, April's monthly data including retail sales, housing data and industrial production will be released. The month marks the trade escalation, making it crucial to observe any impact on consumption etc. Consensus looks for broadly unchanged growth in retail sales around 6% y/y. The housing market shows a decline in home prices but moderate improvement in home sales. These figures are somewhat outdated, as they precede the US-China trade deal on 11-12 May. We look for a decent recovery in China soon, as front-loading by US importers is set to give a big boost to Chinese exports over the next three months.

Have a great Friday and weekend!

Economic and market news

What happened overnight

In Japan, Q1 national account data reveals a sharper-than-expected decline in GDP at -0.2% q/q (cons: -0.1%), with lower external demand at -0.8% and stagnant consumption, which accounts for more than half of Japan's GDP, in the driver's seat. Capital spending rose by 1.4% q/q, surpassing the consensus of 0.8%. The figures mark the economy shrinking for the first time of the year, underscoring the fragile recovery and complicating the BoJ's rate hike path.

What happened yesterday

In the US, yesterday's data revealed m/m declines in core PPI and control group retail sales, with mixed signals from manufacturing data: the Philly Fed rebounded strongly, but the NY Fed's Empire Index continued to decline. Retail sales details were also mixed, suggesting that the weak retail sales may be a reversal of front-loading effects rather than true underlying weakness. The negative core PPI reading was due to weak services price pressures, while core goods inflation modestly accelerated due to tariffs. Overall price pressures thus seem to remain controlled. Markets reacted by sending yields modestly lower.

Moreover, the budget committee of the US House of Representatives is expected to finalize the reconciliation bill today, combining the extensions to Trump's 2017 tax cuts with other budget changes. The first vote on House floor will most likely take place already this month, but passing the bill through House and Senate is expected to be challenging.

Meanwhile, Fed Chair Jerome Powell opened a two-day conference to reassess the Fed's monetary policy framework, acknowledging the need for adaptation due to more frequent supply shocks and inflation trends.

In the euro area, employment continued to grow in the first quarter of the year, rising 0.3% q/q after growing 0.1% q/q in Q4 2024. Hence, the labour market remains on the strong footing it has been on in the past years despite weak economic activity. The strong labour market is a hawkish argument for the ECB.

Alongside the employment data we also got the second estimate of growth in Q1, which showed GDP rising 0.3% q/q compared to the 0.4% q/q in the first estimate. However, the revision was mainly due to rounding when evaluating the second decimal.

In Norway, mainland GDP rose by 1.0% q/q in Q1, surpassing consensus and Norges Bank's forecast in March, both at 0.6%. Private consumption increased by 1.5% q/q, corporate investments by 1.1% q/q, and residential investments by 0.4% q/q. Despite a drop in public investment and oil investments, the strong figures question the necessity for rate cuts. However, improvements in rate-sensitive sectors may reflect expectations of a rate cut in March that was never delivered. Monthly figures reveal a slowdown during Q1, with January at 1.2 % m/m, February 0.1 % m/m, and March at -0.2 % m/m.

The revised fiscal budget figures showed an increase in spending at 2.7% of the oil fund equity, aligning with Norges Bank's estimates. Support packages for Ukraine contribute to lifting spending to NOK 542.2bn, delivering a substantial fiscal impulse of 2.5%. Much of this spending is unlikely to directly impact the mainland economy.

In Sweden, inflation expectations decreased in April, with CPIF projections returning to 2.1% for both the one- and two-year horizons. The crucial five-year expectation, previously at 2.3% last month, has now aligned with the inflation target of 2%. Overall, this is a positive reading for the Riksbank, with inflation expectations presenting no obstacle should they decide to cut rates in the coming months.

In geopolitics, Russian delegation head Vladimir Medinsky announced that talks with Ukraine will start this morning in Istanbul. Zelenskiy criticised Putin's absence, and the US expressed low expectations for the talks until a meeting occurs between Trump and Putin.

Equities: Equities drifted gradually higher, with some interesting dynamics. Major indexes were 0.5-1% higher, but underlying sectors and style preferences flipped around. Equal weighted S&P 500 outperformed S&P 500 and Europe outperformed US. Interestingly, this happened despite yields plunging 5-10bp, which would normally result in US outperformance. Moreover, it was a defensive comeback, with utilities, consumer staples and real estate outperforming the Mag Seven. Some context is warranted: defensive sectors have lower valuation multiples than in April while cyclical sector valuation has fully recovered. This is not very intuitive and speaks for catch-up in those names, just like the session yesterday. Futures are little changed this morning while Asian stocks are retreating after a strong week.

FI&FX: The last 24 hours have been characterised by broad-USD and NOK weakness while the JPY and CHF have enjoyed souring risk appetite. Softer US figures contributed to sending USD rates meaningfully lower for the first time in a week with the US 10Y Treasury yield back close to 4.40. The EUR curve flattened driven by the long end while Scandi rates generally underperformed. BTP-Bund spreads continue to tighten while Treasury ASW spreads have been stable in recent sessions.