European Breakfast Briefing - Apr 23 2025

Market Snapshot

• Trump administration (verbal) backtracks on Powell and China spur flattening moves in bonds, risk-on rebound extends into Asia
• FX: US dollar firmer, further clawing back some ground after Tuesday's gains; USD/JPY down sharply from peak of ~143.22, falls back below 142.00
• BONDS: Treasuries extend twist flattening in Asia; JGB futures underperform but maintain recent ranges
• JAPAN: Apr flash PMIs show stronger divergence in fortunes between manufacturing and services
• AUSTRALIA: Flash PMIs show economy slowing pace of expansion a tad in Apr
• NEW ZEALAND: Rental market continues to ease

Asian Morning Session

Gold added to Tuesday's retreat from a record (went to as high as $3,500.10/oz) to deal at ~$3,338/oz at writing, symbolising the broader reversal in markets seen from yesterday amidst publicised backtracks from US president Trump and Trump administration officials re: several matters such as the US-China trade war and the possible firing of Fed Chair Powell. Stated progress in ongoing negotiations with countries hit by reciprocal tariffs likely also factored into the mix a tad, noting that POLITICO sources have said that India and Japan are essentially close to reaching general agreements with the US

To elaborate, Tuesday saw US president Trump said that he "never did" have any plans to fire Fed Chair Powell, saying that he had been merely suggesting that Powell "be a little more active in terms of his idea to lower interest rates"

This obviously does run counter to prior messaging from Trump administration officials (NEC Director Hassett said last Friday that the administration was studying how to boot Powell from the Fed). Beyond this event's utility re: confirming how quickly mood shifts can happen in the White House, it also perhaps points to the Trump administration being willing to backtrack on positions depending on moves in the market (particularly that of US Treasuries)

Up next, US Treasury Secretary Bessent said at a closed-door event that he expects a de-escalation with China, given how unsustainable the current situation is. His remarks drove a bid in risk assets, with Chinese stocks (ADRs) and US stocks seen gaining to end in the green come the NY close

US President Trump was asked about Bessent's comments later in the day, saying that the US was "doing fine" with Sino-US relations, and that he doesn't expect a "hardball" negotiation with China

• He also said that he would "be very good to China' and that the final tariff figure would not be "anywhere near" the prevailing 145%. In essence, he said that tariffs would "come down substantially but it won’t be zero"

In other matters, Fed Gov Kugler (permanent voter) said that she sees "upside risks to inflation and downside risks to employment", observing that as tariffs have come in "significantly larger than previously expected", so to does the Fed expect that "the economic effects of tariffs and the associated uncertainty are also likely to be larger than anticipated"

Pricing for Fed rate cuts this year has remained rather muted - particularly as the barrage of tariff escalations between China and the US has died down, while official statements from several negotiating parties have seemed to largely promise quick "deals" to be struck with the US (although US-Japan negotiations appear to have some distance between the two parties at present to an actual trade deal - while sources have said that a "general agreement" is currently close)

Fed funds futures currently price in ~82bp of rate cuts through to end-'24, pointing to fully priced in expectations for three 25bp rate cuts this year - down from a peak of ~97bp of cuts priced in just earlier this week on Monday

• Looking at closer timings, participants are seeing virtually negligible odds of a 25bp rate cut come the Fed's upcoming 7 May monetary policy decision, with just ~2bp of cuts priced in (<10% odds)

FOREX: The US Dollar Index retraced over 61.8% of its 2021–2022 rally (from 89.209 to 114.778), reaching a three-year low of 97.921 on Monday. Tuesday’s rebound to a high of 99.591 provided temporary relief to the 97.690 support level, marked by the March 30–31, 2022 tweezers bottom.

• EUR/USD is currently correcting from Monday’s ~3.5-year high of 1.1573, finding initial support near 1.1264. A breach of the 14-day RSI relative to its 45-day moving average, currently around the 63 level, could signal a deeper pullback toward 1.1144 (April 3 high).
• USD/JPY declined to a seven-month low of 140.48 on Tuesday before rebounding to 143.22, indicating a corrective move rather than an extension toward 139.58. Short-term rallies may be capped below 144.64, offering potential selling opportunities, though a breach above 146.54 would negate the bearish bias. Monitor the 14-day RSI in relation to its 45-day moving average near the 40 level; maintain short positions unless this threshold is decisively crossed.
• AUD/USD appreciated to a four-month high of 0.6439 on Tuesday before retreating to a low of 0.6349. The pair remains within reach of the 200-day moving average (currently near 0.6470), a level not tested since November 11, 2024.
• NZD/USD extended its upward trajectory from April's year-to-date low of 0.5486 to reach a four-month high of 0.6023 on Monday. Based on candlestick analysis, the recent sequence of higher lows since 0.6586 may be challenged as early as Tuesday, should the price break below Monday’s low of 0.5927.

BONDS: Treasuries are mostly richer heading into European hours, with only front-end Treasuries seen dealing a little cheaper at writing. The mixed showing in Treasuries sees them continuing to unwind some of the recent, well-documented steepening in the curve as participants in Asia have chewed over Tuesday's statements from Trump administration officials (and Trump himself) possibly signalling de-escalations in issues such as Fed Chair Powell's dismissal from the Federal Reserve, as well as the ongoing trade war with China

• TYM5 is +0-04 at 110-29+ on volume of ~180K lots at writing, operating towards the upper half of a 0-14 trading range established since the open, having risen from a low of 110-18 seen right at the start of today's trade. The decent bid in the contract sees it trimming some of a three-session streak of losses seen prior (0-19 in total)
• JGB futures are -36 ticks at 140.34 in the second half, respecting its pre-lunch range at writing, trading above session lows made right at the Tokyo open (-50 ticks at 140.20), with the contract seen plunging from its overnight close (-11 ticks at 140.59) then despite the lack of a clear headline driver or matching moves in Treasuries (10-Year Treasuries were cumulatively richer from Tuesday's session). JGB futures are on track for a third straight lower daily close, although still otherwise continuing to respect the range carved out over the past three weeks so far
• ACGBs are mixed at writing, tracking the mixed showing in US Treasuries from Tuesday, although they have cheapened a tad since the Sydney open. YM is -7.0, operating just off fresh session lows (at -8.0), while XM is +1.0, consolidating lower after a failed challenge of its overnight peak (+3.0). Bills run 3 to 9 ticks cheaper through the reds, bear steepening

JAPAN: The flash manufacturing PMI reading for Apr showed the sector contracting at virtually the same pace as in Mar (10th straight month of contraction), while the services PMI showed a rebound into expansion - with that gauge now coming in at/above the neutral 50.0 mark for a sixth straight month. S&P Global said that Japanese firms as a whole have now signalled an increase in business activity for five of the past six months, driven by improvements in services activity - although "the downturn in manufacturing productions also eased" in Apr (Jibun Bank report here)

S&P Global also further observed that the divergence between sectors has also come in across new business inflows - factories are experiencing new orders decline "at the steepest rate in over a year amid a strong deterioration in foreign demand, as well as reports of subdued client spending and concerns over tariffs". Inflationary pressures however remain "acute" across both the manufacturing and services sectors. The year-ahead outlook for output fell to its lowest seen since Aug '20

In all, "uncertainty over the global economic outlook and trade environment, staff shortages and an ageing population dampened confidence across both the manufacturing and service sector"- nothing too surprising here

AUSTRALIA: Flash PMI readings for Apr showed a modest deterioration in both the manufacturing and services gauges, indicating a slightly slower pace of expansion for both sectors - although still pointing to a 4th and 15th straight month of expansion for both respectively. S&P Global noted that the Apr report showed that "business conditions further improved", as "domestic demand continued to act as a strong proponent for business activity growth" in Q2 so far. Companies are also continuing to raise staffing levels at a "solid pace" (S&P Global link here)

NEW ZEALAND: The Trade Me property website noted that the number of listed properties for rent on the website was up ~41% on a Y/Y basis - rising to its highest in over 10 years. The website also noted that rent in Auckland is down ~1.4% Y/Y, while rent in Wellington is virtually unchanged across the same horizon

Trade Me said that "those seeking residential rental accommodation should feel empowered, there's a wider range of options available and tenants have more negotiating power than they have had in years"

As it stands, this should go some way to supporting the view that price pressures in NZ are remaining within the RBNZ's target range, particularly as rent makes up a significant chunk of the CPI measure

• That being said, matters here have focused to downside risks to the outlook (particularly from the external environment), which should leave inflation-related matters taking a back seat for now (barring a large, sustained surge in price pressures)

As it stands, OIS markets are pricing in ~27bp of rate cuts come the upcoming 28 May monetary policy decision, with pricing re: the matter having moderated since the middle of the month - albeit only by a little (was ~30bp priced in around mid-Apr)

Looking further out, a cumulative ~80bp of cuts continues to be priced in for the Nov '25 monetary policy decision (pointing to fully priced in odds for three 25bp rate cuts) - not that much changed from levels seen across the past two weeks

Asia-Pac Data Releases

Source: BBG

European Preview

The Eurozone, UK, France and Germany will be releasing their April Preliminary PMI data.

Manufacturing PMIs are expected to remain contractionary across all regions while service PMIs in Germany and the UK are projected to stay resilient, albeit with France’s services sector continue to lag

The 20% tariffs announced on EU goods on April 3 have likely amplified uncertainty and disrupted supply chains. Manufacturers face reduced export demand, particularly Germany, where pre-tariff stockpiling had temporarily boosted March output

Subdued orders from Asia and delayed investment decisions due to geopolitical risks (eg rising US-China tensions) are weighing on factory activity

Unlike manufacturing though, services are less likely to be affected by tariffs. Services in Germany and UK also benefit from steady consumer spending linked to strong labour markets and easing inflation

Over in NY hours,

Flash PMIs for Apr will headline matters in NY dealing (1345GMT), coming after weekly mortgage application data (1100GMT), and just ahead of new home sales data for Mar (1400GMT). The Fed will also release its Beige Book detailing economic conditions across the 12 Fed districts (1800GMT), which should provide for interesting reading given that some time has passed towards Trump's initial tariff salvoes

The Treasury will sell $30bn of 2-Year FRN (1530GMT) and $70bn of 5-Year Notes (1700GMT) via auction today. Note that the Treasury will sell $44bn of 7-Year Treasuries on Thursday as well

Fedspeak will be headlined by Chicago Fed Pres Goolsbee ('27 voter, 1300GMT), St Louis Fed Pres Musalem (voter, twice at 1330GMT and 1835GMT), Fed Gov Waller (permanent voter, 1335GMT), and Cleveland Fed Pres Hammack ('26 voter, 2230GMT)

Note that apart from Hammack, all other Fed officials are scheduled to deliver opening/closing remarks, which may limit the scope for meaningful commentary on monetary policy

On the data front,

Source: Bloomberg

TREASURIES CLOSE

TREASURIES CLOSE

Treasury curve flattening featured Tuesday, relinquishing most of the previous day’s gains as general sentiment brightened on hints of a de-escalation in the trade war with China

• Treasury Secretary Bessent described the current situation between the two countries as unsustainable, allowing for a potential deal with China even though negotiations have yet to begin
• Although Bessent’s comments were short on substance, China-facing sectors rallied strongly, triggering a rebound across stocks, bonds and major USD pairs
• Global fear benchmarks like gold and the Japanese yen finished lower after printing fresh highs early in the session, perhaps marking a turn
• Regional Fed surveys from Richmond and Philadelphia were predictably bad, but had little impact on markets
• See: Things That Stick Out: Tuesday Morning Meeting and Things That Stick Out: Midday Update and Things That Stick Out: Breaking: Bessent Sees De-Escalation With China

The UST 2-yr yield rose five basis points to 3.81% and the 10-yr fell two bps to 4.39%

The $80bln 6-week bill auction drew 4.245% with 67.46% allotted at the high and a bid/cover ratio of 2.88 vs. 2.92 previously.

• Indirects came away with 65.0%. Directs were awarded 2.7% which left dealers with 32.2%

The $69bln 2-year note auction was soft. The notes came at 3.795%, tailing the screen bid of 3.789% by 0.6 bps with 77.99% at the stop. The bid/cover was 2.52 versus 2.66 previously and a prior 5-auction average of 2.67%.

• Indirects took a record 56.2% versus 75.8% previously, and a prior 5-auction average of 76.0%, and direct bidders came away with 30.1% versus 13.6% last and a prior 5-auction average of 13.6%. Primary dealers were awarded 13.7% versus 10.6% last and a prior 5-auction average of 10.3%.

The New York Fed RRP demand was $137.951bln

There was $0.001bln accepted from the same amount bid in the New York Fed repo operation

FX CLOSE

Dollar bounces from three year lows after Treasury Secretary Bessent said he sees US-China de-escalation in the 'very near future'

• On the data front, the Philadelphia Fed Non-Manufacturing Activity experienced a significant collapse, dropping to -42.7 from the -32.5 prior
• Notable declines in the manufacturing component (-13 vs. -4 prior) and business conditions (-30 vs. -14 prior)
• The Treasury Secretary's comments on US-China de-escalation were a significant event, triggering widespread buying of all things US. However, weak demand for the two-year auction gave traders pause with foreign demand notably absent; See: Nasdaq gives back half after soft demand for two-year notes
• The S&P NQ finished up near 2.5%, respectively. This positive performance points to the bullish sentiment in the market driven by the Treasury Secretary's comments on US-China de-escalation and the subsequent widespread buying of US assets.
• Gold traders were keen to book profit on the latest run up to 3500.00 which has seen gold revert below the 3400.00 mark in late NY trade
• Bitcoin, meanwhile, remains steady above the 91k mark, up 4.5% on the session with BTC ETFs taking in their highest inflows since January
• Fed speakers were aplenty but not a lot of new tradeable themes available outside of a few interesting nuggets in Kashkari's Q/A
  • Kashkari emphasized that Fed independence is not just important, but foundational for the central banks. This underscores the gravity of the issue and its impact on the financial markets.Dialed down his earlier comments on tariffs being 'inflationary', clarifies that as 'somewhat inflationary'
  • Says that he is seeing the sharpest fall in confidence since March 2020
• Former Fed official Kaplan, speaking at a sell-side event, says he doubts the Fed will have figured out the rate path by May
• Adds that the Fed will take it one meeting at a time, says Fed independence is crucial to US success; says that "US exceptionalism is real"
• WH Press Secretary Leavitt defended the Presidents attacks on Chair Powell, says Trump has the right to express his displeasure with the Fed; Leavitt continued saying that the President believes Americans should be able to borrow cheaper than they are right now"

EUR falls on broad dollar rebound with dovish remarks from ECB Chief Lagarde weighing on the single currency

• ECB President Lagarde spoke on CNBC and highlighted that tariff impact on growth is a negative
• Lagarde says Euro strength is 'counterproductive'; adds that the Euro's strength is rooted in Europe's strong fundamentals
• Sees downside risks to growth; says the net impact of tariffs on inflation is yet to be seen

JPY, CHF slip on improving risk mood after the yen and franc strengthened past 140.00 and .8100 overnight

GBP steady above the 1.33 mark but well below session highs by 1.3424; BOE MPC member Greene pivots towards the disinflationary risks from tariffs

CAD, MXN finish flat after earlier gold surge sees traders pare back on USD longs

AUD, NZD also backed off respective YTD highs largely because of Bessent's positive China outreach despite the improving risk mood

CENTRAL BANKS

AUCTIONS

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