Cliff Notes: possibilities and probabilities
Key insights from the week that was.
There was no significant data of interest in Australia this week, bookended by Easter Monday and ANZAC Day public holidays, leaving the market’s focus on developments offshore.
In the US, markets continued to react quickly to headlines around trade policy, most of which were tempered in subsequent communications. This includes recent reports of President Trump considering cutting tariffs on Chinese imports by 50-65%, to which Treasury Secretary Bessent later clarified that there is no “unilateral” offer on the table, suggesting such outcomes would require mutual action from China. Also, reports of a potential exemption of tariffs on auto parts before the May 3 deadline were seemingly rebuked by President Trump shortly after. Markets also grew anxious over the prospect that President Trump’s disdain over the FOMC’s policy approach could lead to an attempt to oust Chair Powell, but nerves have since been calmed as President Trump explicitly stated that he had no plans to fire the Federal Reserve Chair.
On balance, markets are viewing recent messaging as more constructive, but the persistence of back-and-forth headlines on ‘possible’ avenues for trade policy, none of which have been officially delivered, leaves an air of uncertainty looming over the outlook.
The data flow broadly agreed with this assessment. This week, the Federal Reserve’s Beige Book reported that while there have been few material changes in overall economic activity since March, uncertainty is heightened across several districts, especially as it relates to tariffs. Spending was mixed, with the ‘front-running’ of vehicle purchases ahead of tariffs able to offset declines in consumption elsewhere. However, many businesses are adopting a cautious approach to their investment and hiring intentions until there is more clarity on economic conditions, though relatively few firms are preparing for layoffs as of yet.
The US S&P Global PMIs were somewhat mixed. Manufacturing beat expectations for a decline, instead lifting from 50.2 in March to 50.7 in April. Meanwhile, growth in services activity moderated by more than expected, falling from 54.4 to 51.4. While the exact impact of tariffs on current conditions is not yet clear, the report noted that business expectations have dropped to their lowest level since the pandemic and that tariffs are the main contributor to recent price rises. While next week’s Q1 GDP data is likely to capture some big swings around imports and inventories amid tariff ‘front-running’, the onset of deep pessimism among US households and its impact on underlying consumer spending will be an important focus.
Similarly, across the pond, the Eurozone’s HCOB PMIs also revealed that manufacturing conditions fared better than consensus feared, holding broadly steady at 48.7 in April. Most manufacturers are reportedly “not too fazed” in the face of broad-sweeping tariffs of 10% and auto-specific tariffs of 25%, however the services gauge disappointed, falling from 51.0 to 49.7 as business confidence plummeted to its weakest level since 2020.
Meanwhile in the UK, the S&P Global PMIs suggest that growth slowed considerably moving into the second quarter, with manufacturing conditions sliding further into deep contraction while services activity surprised materially to the downside, falling from 51.5 in March to 48.2 in April. Against a backdrop of aggressive job cutting and deep business pessimism, the report noted these results are consistent with GDP contracting at a quarterly rate of –0.3%.
Finally in Japan, April’s Jibun Bank PMIs continued to report sluggish conditions in the manufacturing sector, with a sharp decline in new orders as a result of weakening foreign demand and growing uncertainty over tariffs. In contrast, the services sector reported a bounce in demand, seeing the index move into expansionary territory. Both sectors are reporting acute inflationary pressures, which for policymakers’ looking to achieve long-term sustainable inflation, is likely viewed as another welcome signal. However, this is unlikely to shift the dial just yet, with the Bank of Japan expected to keep rates on hold at its policy meeting next week.
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