PMI Readings Drop in Europe

MACRO FRAME

President Trump’s ceasefire extension pivoted sentiment, but the continuation of the blockade – both from Iran and the US, as well as a lack of a timetable for future talks offers uncertainty that potentially caps upside gains.

STOCK INDEX FUTURES

US equity index futures moved lower overnight with no positive news out of the Middle East and a batch of PMI data out of Europe, which showed that business activity and outlook continue to be negatively impacted by the conflict. Germany’s private sector contracted for the first time in 11 months in April, with the Flash Composite PMI dropping sharply to 48.3 from 51.9 in March, well below market expectations of 51.1. The services sector drove the downturn, while manufacturing maintained a tentative expansion. For the eurozone as a whole, the private sector dipped into contraction for the first time in 16 months in April, with the composite index falling to 48.6 from 50.7 in March, ending a 15-month sequence of growth. The decline was driven entirely by the services sector, which posted its sharpest drop since the pandemic lockdowns of early 2021. The UK was a notable standout, being the only major economy to remain in expansion territory in April, with manufacturing and production activity higher. For the US, a services reading in the high-40s (likely 48–49 range if it tracks the European deterioration), modest manufacturing expansion, though the inflationary subindices remain the most market-relevant component of the release.

Despite yesterday’s rally, the S&P (and global equities) remain largely sensitive to oil prices.

The June S&P is trading down from Wednesday’s settlement of 7,171.25, within an overnight range of 7,105.50 to 7,164.00. Near-term support is seen at 7,105.50 (overnight low), then the 7,100 round number, with initial resistance at 7,164.00 (overnight high), 7,171.25 (prior settlement), and the 52-week high of 7,185.75. SPX cash remains well above its 50-day moving average of 6,774.28 and above the 200-day at 6,698.45.

The June Nasdaq is trading down from Wednesday’s settlement of 27,083.00, within an overnight range of 26,848.00 to 27,099.75. Near-term support sits at 26,848.00 (overnight low), with deeper support at the 26,500 psychological level; initial resistance lines up at 27,083.00 (prior settlement), 27,099.75 (overnight high), and the 52-week high of 27,136.00. NDX cash remains comfortably above its 50-day moving average of 24,846.56 and above the 200-day at 24,669.02.

The June Dow is trading down from Wednesday’s settlement of 49,668, within an overnight range of 49,130 to 49,532. Near-term support is seen at 49,130 (overnight low), then the 49,000 psychological round number, with initial resistance at 49,532 (overnight high), 49,668 (prior settlement), the 50,000 round number, and the 52-week high of 50,937. DJIA cash remains above its 50-day moving average of 47,919.86 and above the 200-day at 47,036.15.

The VIX is trading at 19.75, up 0.83 points (+4.39%) from Wednesday’s close of 18.92, reflecting rising hedging demand as futures pull back from Wednesday’s record Nasdaq close on renewed U.S.–Iran talks uncertainty. The reading sits in the upper end of the moderate 15–20 band and is pressing toward elevated territory, indicating some re-engagement of tail-risk hedges and supporting a modestly defensive near-term posture into the cash open.

Watch point: Markets are awaiting confirmation of formal talks between the US and Iran as a precursor to continue the rally. Without such, gains in the equities are likely to face strong headwinds.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.20% higher at 98.78 as overnight moves saw traders sell risk assets in favor of the dollar following a round of mostly negative PMI readings out of Europe. The geopolitical backdrop is likely to keep a tight grip on currency markets, consistent with the price action of recent weeks. Positive developments regarding US-Iran negotiations are likely to put the dollar on the backfoot, while a continuation of the status quo could see the dollar trade sideways until there is further clarity on formal talks between the two countries.

Underlying fundamentals make the case for a resumption of the dollar’s downward trend once the US and Iran are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away. With the labor market softening materially, the underlying case for a Fed rate cut later in the year remains intact.

Watch point: The dollar continues to find safe haven support and trade in line with oil prices. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro fell 0.2% to $1.1638 following the release of PMI figures, which showed a sharp drop in economic activity. The composite index for the eurozone fell from 50.7 to 48.6, ending 15 straight months of growth. Services hit a 62-month low of 47.4, its sharpest decline since the February 2021 pandemic lockdowns. Manufacturing PMI surged to a 47-month high of 52.2, though S&P Global attributed much of this to defensive inventory accumulation, not genuine demand. Additionally, the prices index revealed businesses were facing the biggest surge in cost pressures since 2000.

The euro is likely to continue trading opposite oil prices. Positive developments out of the US-Iran conflict will be supportive of the currency, while safe-haven demand would see flows to the dollar. Traders are still pricing in rate hikes by the year’s end but ECB President Christine Lagarde said the bank needs more information before drawing firm policy conclusions.

Watch point: A rate hike at the ECB’s April meeting is unlikely, while the case for tightening depends on the effectiveness of the ceasefire and duration of the rise in energy prices.

BRITISH POUND: Sterling is down 0.1% to $1.3491. PMI data for the month of April showed a pickup in private sector activity, with both the manufacturing and services sectors expanding. Manufacturing PMI hit 53.6, a 47-month high, driven by customer front-loading and safety stocking. Services also firmed to 52.0 from a near-stagnation print in March. Input cost inflation surged to its highest since November 2022, with the month-on-month acceleration in service sector cost inflation described as the largest single-month jump since the index began in 1996.

March’s headline CPI rose to 3.3% from 3.0% in February, with energy prices serving as the primary driver of the increase. Core CPI eased modestly to 3.1% from 3.2%, which is likely to reinforce the Bank of England’s view that it remains too early to assess what the rise in headline inflation means for broader price pressures.

Slowing wage growth remains a key factor which could limit the BoE to one rate hike, against market expectations of two hikes in 2026. The critical watchpoint, however, is whether higher energy costs begin to feed into wage demands. While an April rate hike is unlikely, policymakers will be closely monitoring whether energy price strength is translating into broader wage pressure. Rate-hike timing expectations remain subject to the evolving conflict in Iran, and the situation continues to develop.

Sterling faces headwinds on two fronts. Geopolitical risk between the US and Iran continues to weigh heavily on price direction, while domestic political uncertainty adds to the downside risks for the pound. Prime Minister Starmer drew scrutiny earlier this week after attributing the controversy surrounding the US ambassador appointment to Foreign Office officials, claiming he had not been informed — a development that may further cloud sentiment around UK assets.

Watch point: While an April rate hike is unlikely, policymakers are likely to monitor data on whether higher energy prices are leading to bigger wages demands.

JAPANESE YEN: The yen is little changed at 159.45 yen per dollar. The Bank of Japan is likely to hold off raising interest rates next week, as prospects of a near-term end to the Middle East war keep the country’s economic and price outlook uncertain. Markets have scaled back timing of a rate hike by the BoJ to September. Still, market-implied odds place a 50% chance of a hike at the June meeting. The BOJ is also expected to lift inflation forecasts while lowering growth projections, reflecting higher energy costs and broader headwinds linked to the Iran war.

The Yen has failed to hold a depreciation past the 160 level, as expectations of government intervention and eventual policy tightening offer support. However, a lack of policy-tightening at the bank’s meeting next week could see the yen routinely test the 160 level. The yen’s near-term trajectory remains hostage to geopolitical developments, a durable ceasefire could quickly unwind oil-driven inflation expectations and reduce urgency for BoJ action, though the bank is set to maintain its tightening bias.

Watch point: While an April rate hike is unlikely, confirmation of a near-term move upwards in policy could bring USD/JPY closer to 155, though geopolitical factors remain the main obstacle to appreciation against the dollar.

AUSTRALIAN DOLLAR: The Aussie is down 0.13% to $0.7149. Australia’s composite PMI recovered to 50.1 from March’s 46.6. Manufacturing PMI recovered to 51.0 from March’s final of 49.8, a 2-month high and a return to expansion after one month below the waterline. However, the underlying details were notably soft: output continued to decline (albeit at a slower pace), and new orders, employment, and inventories all edged lower. Meanwhile, higher fuel and freight costs drove input cost inflation to its highest in nearly four years.

Market implied odds are placing a 75% chance that the Reserve Bank of Australia will deliver a third straight rate hike in May, with rates seen peaking at 4.6% by the end of the year. Analysts at Commonwealth Bank of Australia have tempered their bearish view on the currency, now forecasting it to fall to $0.69 by the end of June, instead of $0.67 previously. The Australian calendar is light this week, so the Aussie’s movements are likely to be dictated by headlines from the Middle East.

Labor data last week showed employment rose in March, while the jobless rate remained low, firming support for a May rate hike. While a durable ceasefire would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures.

TREASURY FUTURES

Yields are mostly higher pre-market, as traders react to inflationary PMI prints out of Europe ahead of the US’s data later in the morning. Current levels: 3M 3.678% (−0.6 bps), 2Y 3.800% (+0.6 bps), 5Y 3.931% (+1.6 bps), 10Y 4.298% (+0.4 bps), 30Y 4.914% (+1.2 bps). The 2/10 spread stands at 50.20 bps (flat vs. prior session), the 5/30 spread is at 98.00 bps (marginally narrower from 99 bps), and the 3M/10Y spread is at 62 bps (uninverted, 1 bp wider from 61 bps). The move reflects modest bear steepening in the 3M/10Y leg and a slight bearish twist mid-curve, consistent with concession-building after yesterday’s soft 20-Year reopening auction.

TIPS markets show the 5-year breakeven at 2.61%, the 10-year breakeven at 2.38%, and the 5y5y forward rate at 2.15%. The spread between the 5-year and 10-year breakevens of +23 bps (5Y/10Y) confirms that markets continue to treat the current inflation rise as front-loaded and largely transitory rather than broadening into longer-horizon expectations. With the 5y5y forward at 2.15%, well below 2.5%, the Fed retains full optionality to treat near-term CPI acceleration as transitory and maintain a dovish lean on the policy path.

For the time-being, longer-run inflation expectations are offering resistance to higher yields as the Fed should remain biased towards policy-easing given weakness in the labor market. The spread between one- and two-year inflation swaps remains elevated, signaling that markets continue to expect the effects of higher energy prices to be transitory and should offer underlying support for bond prices, absent a drastic change in US-Iran hostilities.

Market expectations for Fed easing have been pushed farther out, though are still favorable to a dovish stance from the Fed. Markets are no longer pricing in any cuts for 2026, while seeing nearly a 44% chance for a cut in July 2027.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

 

 

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