Sunset Market Commentary

Markets

European PMIs offered a first glimpse of the impact on the German-European defense initiative on business. So far, though, the huge government spending announcements only lifted the forward looking indicator (sentiment towards future activity), specifically in Germany. That makes sense of course since all of this still needs to translate into actual policy decisions and thus into the real economy. It’s against that backdrop we shouldn’t be too worried about an overall slight miss of the composite European PMI, which came in at 50.4 vs 50.7 expected and picking up from 50.2. It’s nonetheless the highest print in seven months. Manufacturing was responsible for the improvement. While the overall indicator is still in contraction territory, the 48.7 was the highest reading since February 2023. In addition, the output subseries returned to growth for the first time in two years. Germany contributed to this due to what is seen as a production boost ahead of import tariffs. While this is likely to fade again, the effects of the large infrastructure & defense package may take over afterwards. The services gauge fell to a four-month low of 50.4. New orders dropped in both sectors and with a faster rise in services employment and softer reduction of the work force in manufacturing, backlogs of work fell once again. Input costs inflation eased due to a services-lead slowdown, be it to a still sharp rate. This resulted in the slowest pace of rising selling prices year-to-date. Interestingly though, the manufacturing sector raised output prices for the first time in seven months. In theory today’s outcome support the case for a final, tactical ECB rate cut in April before moving into an extended pause, our preferred scenario. Euro area money market thinking, however, remains split with implied probabilities only marginally rising to 63% compared to 58% on Friday. That’s also keeping European yields in check. They erased some kneejerk losses quickly to trade between 1-3 bps higher in a steepening move. We suspect reports of the US pursuing a more targeted approach in the reciprocal tariff threat (April 2 is the due date) instead of blunt, widespread and/or cumulative (on existing levies) increases to have helped in the background as well.

Divergence again between the US and Europe, but this time with the US Global March PMI printing substantially stronger than expected (53.5 from 51.6). Still the report contained some ‘mixed’ signals. Services activity improved sharply from 51.0 to 54.3, the highest level in 3 months. The manufacturing PMI declined from 52.7 to 49.8. Despite the overall improvement, S&P indicated that business expectations for the year ahead fell to their second lowest since October 2022 as companies grew increasingly cautious about the economic outlook. Cost pressure also intensified across the economy and fed through in selling prices, especially in manufacturing. Despite the uptick, S&P assess that the survey still points to slower growth in Q1 (1.5% Q/Qa) and that sentiment darkened further. Markets apparently gave more weight to the positives. US yields jumped after release to currently trade 6.0 to 8.0 bps higher across the curve. Despite persistent uncertainty, US equities (Nasdaq +2.0 %) and the dollar DXY (104.3) outperform. The euro initially weathered a slightly disappointing EMU PMI quite well, but dropped back to the 1.08 area after the stronger than expected US PMI. In the UK, the PMI also showed a surprise rebound (52.0 from 50.5, highest in 6 months) due to a sharp improvement in services activity (53.2). S&P also indicted a robust increases in prices charged. The reaction of UK markets was a bit mixed with only a limited changes in UK yields, but sterling performing solidly, especially against a bleak euro. EUR/GBP declined to test the 0.8350 area.

News & Views

Data published by Statistics Poland showed February real retail sales declining by 6.0% M/M to be 0.5% lower Y/Y. The outcome was substantially weaker than expected. In a monthly perspective, sales declined 13.6% for textiles, 7.1% for household goods, 4.9% for food and 3.9% for pharmaceuticals. Monthly retail sales data are notoriously volatile and Statistics Poland indicates that the data was influenced by a smaller number of trading days compared to February last year. Even so, the disappointing retail sales releases follow weaker than expected production data and softer than expected wage growth data early published last week. Recent softer than expected data question the hawkish stance from central bank governor Glapinski and might at least support the case of some of the more dovish members within the MPC to keep the debate open on possible interest rate cuts, e.g. in the second half of the year. The Polish 2-y swap yield eases 4 bps to 4.92% but the zloty remains well bid, with EUR/PLN declining to 4.176.