Stagflation fears rise as US manufacturing slumps – Commerzbank

The Dallas Fed's Manufacturing Activity Indicator delivered more bad news yesterday. At roughly -36, it was almost 19 points worse than expected. New orders plummeted significantly, while prices paid rose significantly. No wonder that the US dollar came under pressure again yesterday. In line with this, Bloomberg recently published the results of its April survey of economists, and the findings are likely to have further heightened US stagflation concerns, Commerzbank's FX analyst Michael Pfister notes.

Asian trade diversion may strain US relations

"Imports from Japan, South Korea, Taiwan, and Vietnam collectively overtook imports from China at the beginning of 2023. Will the governments of these four countries allow companies to increasingly ship goods through their countries? This seems questionable to me, as this would further increase these countries' current account surpluses in trade with the US and complicate any potential deals with the US. And Trump is unlikely to be in a position to turn a blind eye to such shifts in trade flows this time."

"Donald Trump never tires of emphasizing that China must bear the costs of the tariffs and repeatedly suggests that the supposedly enormous revenue could even be used to reduce US income taxes. The subcomponents of the sentiment indicators suggest that it won't be quite so simple. Rather, US consumers will likely also have to bear a large portion of the price increases."

"The Fed is likely to have a much tougher time than in previous years. Other central banks can focus more on the real economy in light of the positive supply shock in their countries, while the Fed must master the balancing act between inflation and the real economy. It would certainly help if the upcoming hard data (JOLTS labor market data today, first-quarter growth tomorrow, payrolls on Friday) remained strong for a while. But I wouldn't bet on it."