Stocks advance again

It was another generally positive session in markets yesterday. Stocks advanced again albeit the main US indices finished off their very best levels of the day. The dollar also recovered some more ground although its gains were fairly modest. The euro is trading at about $1.1375 against the US currency this morning, while the pound is hovering around the $1.33 level, leaving EURGBP little changed from this time yesterday morning at £0.8550.

In government bond markets, 2-year yields rose (+5-8bps) amid some paring back of central bank rate cut expectations. The market is currently pricing in about 65bps of cuts from the ECB by the end of this year, almost 90bps from the Bank of England (including a very high probability of a 25bps reduction at next month’s meeting), and some 75bps from the Fed (with a 25bps cut not fully priced until the July meeting). In equity markets, European stocks gained almost 3%, while the Nasdaq led the way in the US advancing by 2.5%.

Flash PMIs for April show growth slowing in the US, a stagnant economy in the Euro area, and declining output in the UK, with tariffs and tariff-related uncertainty weighing on activity in all three. Similarly, the Fed’s latest Beige Book reports that the economic outlook in the US has “worsened considerably as uncertainty, particularly surrounding tariffs”, has increased. It also notes that firms expect “elevated input cost growth resulting from tariffs,” with “most businesses” expecting to pass through additional costs to customers.

ECB President Christine Lagarde says the impact of US tariffs on the Euro area economy is “probably…going to be disinflationary more than inflationary,” noting (once again) that – given its trade war with the US  – China “will want to reroute its exports somewhere, possibly to Europe (which) would have a dampening impact on prices.” Meanwhile, her Bank of England counterpart, Andrew Bailey, says “we have to take very seriously the risk to growth” from increased tariffs, noting that “it’s not just the relationship between the US and the UK, it’s the relationship between the US, the UK and the rest of the world that matters because the UK is such an open economy.”

For the day ahead, economic data include weekly jobless claims, capital goods orders, and second-hand homes sales in the US, while a number of ECB members are due to speak over the course of the day.