Trump's tariff twists stir up markets

In focus today

• Monday kicks off quietly, with no significant key data releases scheduled.
• In general, the week will be light on the data front, with the main releases including US consumer confidence on Tuesday, FOMC minutes and euro area inflation expectations Wednesday, and May inflation data for Germany, Spain and Italy as well as US personal spending/PCE figures on Friday. Weighing heavily on markets, we will continue to keep an eye out for any news on trade talks. Note that the Danske Morning Mail will not be published on Thursday and Friday this week due to the Ascension Day holiday.

Economic and market news

What happened since Friday

Trade talks were in the limelight again, as Trump threatened Apple with 25% tariffs and the EU with 50% tariffs starting 1 June. Trump laid out the playing field, stating that he "is not looking for a deal" with the EU, as discussions are reportedly "going nowhere". However, yesterday it was announced that Trump backed away from this threat, agreeing to extend the deadline until 9 July (as was the initial deadline) between the US and the EU. The U-turn comes on the back of a conversation between Trump and EC President von der Leyen, with both parties opting for a swift and constructive agreement. Accordingly, this largely confirms that Trump's tariff plans can be regarded as a negotiation tool.

In the euro area, wage growth declined to 2.4% y/y in Q1 2025 relative to 4.1% y/y in Q4 2024, according to the ECB's negotiated wage indicator. The large drop in Q1 mainly reflects one-off inflation compensation paid to workers in Q1 last year. While this decline overstates the underlying momentum in wage growth, excluding these one-offs shows a clear downward trend. This is visible in the ECB's wage tracker, which points to lower wage growth for 2025 and in company survey data indicating total wage growth around 3% y/y - consistent with inflation returning to 2%. Together, these wage indicators support further ECB rate cuts this year, as they imply lower services inflation. Importantly, negotiated wages do not capture the full picture, as they exclude overtime, salary increases to new or promoted staff, bonuses, and individual compensation not linked to collective bargaining. As such, the full overview of wage growth in Q1 2025 will come with the third estimate of the national account data on 6 June in the compensation per employee measure - the ECB's preferred wage measure. 

In Germany, Q1 2025 GDP growth was revised up to 0.4% q/q (flash: 0.2%), due to new export data for March released since the flash estimate showing a large increase in exports, likely due to front-loading to the US. This could result in weaker exports in either Q2 or Q3. Yet, besides front-loading of exports, private consumption rose 0.5% q/q, which is strong compared to the weak consumer confidence and a more positive sign for the economy.

In Sweden, employment was flat over the month - markedly better than expected after the large increase in March. Thus, the labour market data points to a resilient Swedish economy, which reinforces our view that the Riksbank will stay on hold in June.

Equities: Friday was one of those days with equities, bonds and dollar selling off at the same time. For every time the correlation flips, the bigger the risk of structural changes to the US equity exposure for pension funds and others. Though the flip in correlations is worrying, the overall equity moves were not. Equities recovered most of the losses into the session, as investors are clearly getting used to Trump's negotiation tactics. At least that is the market interpretation of it all, with close to zero discounting of the risk of 50% tariffs actually being implemented. Just take the Mag 7 companies, down a meagre -1.5% on the news. These companies generate between 25-40% of revenues in Europe. If 50% tariffs on Europe really were to happen, we would likely see EU going hard at them. Given the small reaction to Mag 7 on Friday, it is obvious that investors do not price in any meaningful escalation.

Equities and bonds recovered about half of their intra-day losses on Friday and futures suggest that European rebound will continue today. Stoxx 600 closed -0.9% after dropping north of -2% intra-day. Similarly, S&P 500 shaved off only -0.7%. Despite the impressive intra-day rebound in equities, defensives still outperformed and did so overall last week, for the first time in four weeks. Apple one of the underperformers on Friday, down -3% on new tariff threats from Trump. Again, market impact is not very alarming: We will likely see Tim Cook promising US made iPhones by 2030, but taking no concrete action to do so, and both the president and shareholders will be happy. US and UK are closed for holiday today.

FI and FX: The USD sold off on Friday, when US President Donald Trump called for a 50% tariff on imports from the EU thereby escalating the trade war again. EUR/USD rose to the highest since early May on the news. However, the market did not sell US Treasuries this time around with the 10Y yield holding steady around 4.50%. Both SEK and NOK gained vis-à-vis the EUR. The latter continues to trend stronger, while the former rose to the strongest level in about two weeks.