Macroeconomics: The Day Ahead for 3 April

The world and financial markets remain in shock from what are US reciprocal tariff measures that were higher than most had anticipated, in part because the rose tinted spectacles perspective remains the dominant one, a form of popular defence mechanism against what is a very ugly world. I can only reprise this from William Pfaff “If it is true that the West has characteristic crimes in its past, as well as those manifest virtues we are quick to acknowledge, then we must face the possibility that a disposition to these crimes—primarily a crime of ideological violence — is neither burned out in our West itself nor precluded in those vaster regions of the world now being swept into the ambiguous experiences of our own disordered Western past.” (The Bullet’s Song: Romantic Violence and Utopia).

In terms of immediate market reaction: in the first instance, one has to bear in mind a) markets were clearly wrong footed, best example was rally in US stocks yesterday b) that means all those types of optimistic positions need to be cleared out. Once that has happened, the real market reactions start to emerge… Historically the gut reaction to major events, e.g. Lehman collapse, has proven to be a bad guide to the short to medium trend. But USD down against majors, EM FX under the cosh, gold up, stocks down, bond yields down are all logical moves.  But also do bear in mind the two most obvious ‘carve-outs’ in these tariffs are oil & gas and pharmaceurticals. It will be interesting to see what happens to credit spreads over the next week (ignore the first 48 hours as it will likely be messy given differing liquidity conditions in govt bonds and credit markets).

China and Taiwan are closed for the rest of the week for the Ching Ming Festival, with today’s data run finding its focal points in Services PMIs/ISM, Swiss and Turkish CPI, and US weekly Jobless Claims, Challenger Job Cuts and US & Canadian Trade, though all of this is moot given the tariff shock. A host of ECB, Fed and other central speakers accompany the release of the March ECB minutes, while a busy run of govt bond auction has Japan 10-yr, multi-tranche sales in France and Spain, UK 15-yr and Canadian 10-yr.

** World – March Services PMIs/ISM **

– Japan’s Services PMI echoed the steep setback seen in the national services “Economy Watchers” survey, and once again raises questions about the strength of domestic demand (as has been consistently signalled by at best flatlining, and often declining Household Spending), despite the sharp rise in nominal wages. In Europe, the final UK Services PMI is expected to be unrevised from the sharp rebound to 53.2 from February’s 51.0, while national Eurozone readings highlight a very large divergence between a continued sharp contraction in France, marginal expansions in Germany and Italy, and ongoing strength in Spain, with the pan Eurozone reading seen unrevised at 50.4. US ISM Services is expected to be unchanged at 53.5, but Prices Paid to continue a sharp shift higher to 64.2, after hitting a near 3-yr high of 62.4 in February, with upside risks to the latter given the surge in the equivalent Manufacturing sub-index, with the details on Orders, Employment and Outlook expectations very much in the spotlight.

** Eurozone – ECB March minutes **

– These minutes will perhaps be combed with a finer tooth comb, given a clearly quite heated debate about how much further rates should be cut, and the risks on the inflation outlook (notwithstanding US tariffs), with a number of recent speakers clearly leaning towards an April policy meeting pause. Despite Tuesday’s lower than expected CPI (and the notable fall in Services CPI to 3.4% from 3.7%) Lagarde noted yesterday that the fight against inflation was not over yet, while the always hawkish Holzmann added: ‘We had assumed inflation would come down. As we (i.e. rates) are neutral and inflation is converging to target, there is no reason to become accommodative.” The dovish wing will doubtless argue that the focus should be on downside risks to growth, though some argue that with rates at neutral levels and already quite low, the ECB should perhaps keep its powder dry, and adopt the Fed’s ‘wait and see’ approach.