• Europe treading water ahead of US CPI.

  • New Zealand inflation expectations fall.

  • US-China relations in focus ahead of expected tariff announcement.

European markets are treading water in early trade as we cautiously enter a new week that will likely be dominated by Wednesday's US inflation gauge.  With 92% of the S&P 500 having already reported their first quarter earnings, markets will be actively shifting their focus more keenly back towards economic factors in the weeks ahead. On a day that is largely devoid of major news, traders will be looking closely at the potential scenarios on Wednesday. Given the recent resurgence in US inflation, we could potentially see fresh risk-off sentiment emerge should monthly inflation come in above 0.2% yet again.

Overnight data out of New Zealand saw the two-year inflation expectations figure from the RBNZ cut to 2.33%; a two-year low for this metric. While the RBNZ have signalled a high likeliness that we will have to wait until next year to see their headline rate cut back from 5.50%, markets appear to have not read the memo given current pricing for two 2024 cuts. The one-year inflation expectation of 2.73% does highlight the expected downward trajectory ahead, although patience is the name of the game for now.

Concerns over an impending trade war between the US and China in the event of a Trump re-election will be concerned to note that such a move could come sooner than anticipated. Joe Biden looks set to announce a major hike in levies on Chinese imports as early as tomorrow, with a 100% tariff on Chinese EV’s set to grab the headlines. Tesla shares have been hit hard over the past year as price competition from the likes of BYD highlight the company’s uncertain future in the event that those cheap Chinese alternatives hit US and European markets. For now, the impact on these Chinese firms will be limited given that only Geely had a material number of cars exported to the US. However, Chinese firms could look to set up production in Mexico as a means to avoid levies and benefit from the favourable US-Mexico trade relation. Elsewhere, there will be concern that speculated tariffs on medical supplies and metal products could simply serve to raise inflation pressures at a time when the Fed are trying their hardest to drive down price growth.

 

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