U.S. Indices had rallied early Wednesday morning and accelerated to peaks in the US session on positive rhetoric regarding China and US trade. The Wall Street Journal reported that the White House is considering cutting China tariffs to de-escalate the trade war, with tariffs likely to be between 50-65%, but no final decision has been made. This report saw the E-Mini S&P 500 futures test 5,500 to the upside. However, the gains then pared with officials noting the White House is not considering something unilaterally, it would be part of negotiations, and that negotiations are yet to take place. Stocks closed well off the earlier peaks but remained firmly in the green. Also supporting the equity space was US President Trump overnight, saying he would not fire Fed Chair Powell, but he continued to call for lower rates. This saw the Treasury curve flatten, while T-notes were choppy in response to the WSJ trade report. T-notes initially chopped on the report but swiftly pared with a one-way trade lower thereafter into settlement, settling relatively unchanged (nearly a whole point off the highs). The downside was likely driven by details of the report being digested (50-65% tariffs are still very high), and as officials dialled down the softening tone on China. Crude prices were choppy but ultimately settled in the red with reports from Reuters that several OPEC+ members want the group to approve another accelerated oil output increase for June, hitting both WTI and Brent. In FX, the Dollar was strong against the Japanese Yen, Euro and Swiss Franc during the risk-on trade. Elsewhere, earnings were in focus with Tesla (TSLA) rallying despite a weak report, but as Musk signalled, he will be scaling back his DOGE work. Boeing (BA) rose after a stronger-than-expected report, while AT&T (T) were flat. Philip Morris (PM) also beat expectations. Data took the back seat with the focus largely on trade/Trump updates. Nonetheless, Flash PMI data in the US was mixed (services missed, manufacturing beat, but composite fell), while new home sales topped all analyst forecasts. The S&P Global Flash PMIs for April saw Manufacturing top expectations at 50.7 (exp. 49.1, prev. 50.2), while Services missed at 51.4 (exp. 52.5, prev. 54.4), meaning the Composite fell to 51.2 from 53.5, which incidentally is a 16-month low. Business expectations about the year ahead also dropped to one of the lowest levels seen since the pandemic, while prices charged for goods and services rose at the sharpest rate for just over a year, with an especially steep increase reported for manufactured goods, linked to tariffs. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that the data points to a marked slowing of business activity growth at the start of Q2, accompanied by a slump in optimism about the outlook. As well as this, as price pressures intensified, it creates a headache for the Fed, which is coming under increasing pressure from the President and also to shore up a weakening economy just as inflation looks set to rise. Manufacturing is broadly stagnating as any beneficial effect of tariffs is offset by heightened economic uncertainty, supply chain concerns and falling exports. Lastly, confidence about business conditions is worsening due to the impact of the Trump administration announcements, while tariffs are also cited as the key cause of higher prices. New Home Sales rose 7.4% in March to 724k (prev. 0.674k), above the 680k forecast and above the top end of analyst forecasts (700k). Despite the report being much stronger than expected, Oxford Economics “still see limited upside for sales in 2025 given our forecast for mortgage rates to remain elevated and the economy to weaken in response to the Trump administration’s tariff policies. The Fed’s Beige Book was released last night: It was little changed since the previous report, but uncertainty around international trade policy was pervasive across reports. Just five Districts saw slight growth, three Districts noted activity was relatively unchanged, and the remaining four Districts reported slight to modest declines. Manufacturing was mixed, but two-thirds of Districts said activity was little changed or had declined. The energy sector experienced modest growth. Agricultural conditions were fairly stable across multiple Districts. The outlook in several Districts worsened considerably as economic uncertainty, particularly surrounding tariffs, rose. Prices were also little changed since the previous report, but uncertainty around international trade policy was pervasive across reports. Just five Districts saw slight growth, three Districts noted activity was relatively unchanged, and the remaining four Districts reported slight to modest declines. Manufacturing was mixed, but two-thirds of Districts said activity was little changed or had declined. The energy sector experienced modest growth. Agricultural conditions were fairly stable across multiple Districts. The outlook in several Districts worsened considerably as economic uncertainty, particularly surrounding tariffs, rose. Meanwhile, Fed Member Kugler said tariff increases are significantly larger than previously expected, and the economic effects of tariffs and uncertainty are likely to be larger than anticipated. Kugler added that they are facing potential shocks now, much related to tariffs and uncertainty. Ahead, Kugler supports holding the policy rate steady as long as upside risks to inflation remain, while economic activity and employment remain stable. Kugler reiterated a familiar Fed line that the central bank policy is well-positioned for macroeconomic changes. Speaking on inflation expectations, something the Fed watches closely, she added that they are largely well-anchored and hopes they remain so. Elsewhere, both Oil and Gold closed lower by 2.3% and 2.6% respectively.
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