US PMIs, AUD inflation and Tesla impact markets

In focus today

In Germany we await Ifo data for April. The current assessment of the economy remains weak, but expectations have risen lately so it will be important to follow if we finally see a turn in the assessment of the current activity.

Economic and market news

What happened overnight

In Australia, the Q1 inflation print came in higher than expected at 1.0% m/m (cons: 0.8%) and 3.6% y/y (cons: 3.5%), due to service price pressures remaining to the high side. For March alone inflation increased slightly to 3.5% against 3.4% in February. The markets now price in very low probability of a rate cut in August.  AUD rates rose upon release and AUD/USD has strengthened modestly. Notably USD rates also rose around 1bp following the release with markets speculating in possible common denominators.

What happened yesterday

In the US, and as widely expected, the Senate passed the USD 95 billion bill which provides military aid for Ukraine, Israel and Taiwan. The bill came to a vote after the house passed the same bill on Saturday. House speaker Mike Johnson suddenly switched course last week after not letting the House vote about the bill for nearly two months.

The US PMIs surprised to the downside in both manufacturing and services driving a considerable move lower in USD yields. Composite PMI landed at 50.9 down from 52.1 in March. There was a notable decline in services output prices index (54.0; from 56.4), snapping the recent rising trend.

Tesla shares jumped after the US close - ending a 7-day streak of declines - as Tesla presented Q1 earnings and a plan to accelerate launch of more affordable cars. With markets closely monitoring earnings reports of especially tech-companies in the US the rise in Tesla spread to the rest of the tech cluster.

The euro area composite PMI rose more than expected to 51.4 (cons: 50.7, prior: 50.3) in April which suggests that the economy is now back in growth territory for the second consecutive month. The economy is driving at two speeds as the service PMIs rose to 52.9 (cons: 51.8, prior: 51.5) in an upward surprise while manufacturing PMI unexpectedly declined to 45.6 (cons: 46.5, prior: 46.1). The output price index in the service sector increased marginally to 55.1 from 55.7. The changes in service output prices have recently been a good indicator of the monthly change in core inflation.

In Sweden, Riksbank governor Thedéen spoke yesterday where he signalled that he has not made up his mind about when we the Riksbank will deliver the first rate cut. He said that before our next interest rate decision in two weeks' time, we need to analyse what the clearly lower inflation means for inflation in the longer term and weigh up the risks of inflation rising again." The lower inflation is positive for the Riksbank, but May is not a done deal.

In the UK, Bank of England's Pill talked with caution on impending rate cuts. He is one of the internal members who has voted with the majority for the entire cycle. Pill said little of news and the passage of time have brought a cut somewhat closer but also that a cut "remains some way off" and there is still "some way to go" before he is convinced of a sustainable return to target. EUR/GBP ended yesterday lower. Comments and data the past week suggest that a May cut is highly unlikely. We think June is still in play with both two inflation prints and two job reports before then set to convince the BoE of a more sustainable easing in inflation pressures. UK PMI's surprise to the topside. Composite at 54.0 (cons: 52.6, prior: 52.8), services at 54.9 (cons: 53.0, prior: 53.1), manufacturing at 48.7 (cons: 50.4, prior: 50.3). However, manufacturing back in contractionary territory. Input prices accelerated in April, however there was a moderation in the rate of prices charged inflation in the UK private sector.

In Hungary, the central bank (MNB) cut the key rate by 50 basis points to 7.75% as expected, which remains an EU-high. This marks a step down in terms of the pace of cuts, as previous cuts have been in the interval of 75-100 basis points. Policy guidance indicates a target for the key rate of 6.5-7% by summer, although different board members have stressed that they are in "no rush" to get there. As such, most likely the MNB will continue to cut interest rates at least over the coming meetings, unless the Forint weakens substantially and/or inflation re-accelerates.

Equities: Global equities climbed higher yesterday, pushing the discussion around corrections off the table. We witnessed broad-based gains with momentum, growth, long duration, and lower quality emerging as the significant victors. Special mention must be made of small caps, which did well yesterday and have performed surprisingly well during the yield run-up since early February. The earnings numbers did not change substantially yesterday, if anything they worsened slightly, but the narrative around earnings did. Commentators are now using equity market performance to gauge earnings instead of examining the numbers directly. In the US yesterday, the Dow was up by 0.7%, S&P 500 by 1.2%, Nasdaq by 1.6%, and Russell 2000 by 1.8%. Asian markets are trending higher this morning, led by Japan, South Korea, and Taiwan. Futures in the US and Europe are also up this morning.

FI: European rates ended marginally higher on the day, amid stronger than expected PMI figures out of Europe. Considering the surprising strength the market reaction was rather muted. That said, hawkish comments from BoE's Pill and US PMIs falling short led to some volatility in the afternoon. Generally, the long end underperformed the shorter end. Intra-euro area spreads traded in a tight range. The 10y German Bund yield ended at 2.50%. ECB rate cut expectations for this year was 2bp lower at 76bp.

FX: The USD weakened on the weaker-than-expected US PMI report, pushing EUR/USD above 1.07 for the first time in almost two weeks. Scandies found support in benign risk sentiment, and EUR/SEK is once again trading below 11.60. Stronger-than-expected UK data made EUR/GBP erase some of the past days' gains.