Wednesday sees the release of some important economic data that markets are very keen to get their hands on. The partial results of the purchasing managers survey for April PMI data come out. That’s key, because it’s the first bit of data to come out covering the period right after the massive April 2 tariff announcement.
If and how companies are reacting will be visible at least in some measure in this upcoming data. Of course it’s preliminary and subject to revisions. And it was also conducted while the tariff escalation and de-escalation was in full swing. So, there could be some additional noise in the data as well. But, it will still be very telling for a lot of investors and traders as to what might actually be the results of the trade war.
Hard to Set Expectations
The situation with the economy and tariffs is so fluid at the moment that many analysts and economists have declined to give forecasts for April PMI data. This means there is a very shaky if not outright unreliable consensus. So, when the data does eventually come out, there could be some extra volatility and counter-intuitive moves in the markets.
The conventional wisdom is that tariffs mean higher prices, due to the increased cost of importing goods. But how exactly purchasing managers respond to those prices is harder to figure out. How many importing companies will choose to absorb the increased cost to maintain customers? How many buyers will shift to other suppliers? How much of the cost can be passed on to the consumer? It all varies, and depends a lot on the individual situation for each company.
What Does It Mean For Forex?
There are a couple of elements that are important for the markets in the PMI data. First is the headline figure, which shows whether the sector is in expansion or contraction. But also there is a component of prices paid. As the name suggests, this is how much purchasing managers are paying for the products they are buying. If this goes up, it’s generally understood that it provides an inflationary pressure. That’s because the higher costs from the company are more likely to be passed on to the consumer.
We don’t have projections of how much prices will vary, given the very unusual circumstances. But, the reaction of the market will likely depend on how it is seen influencing inflation. If prices rise more than anticipated, then the market will likely price in less easing from central banks. This will likely mean those currencies will strengthen. But if the prices are lower than expected, then that gives more room for central banks to keep easing, which would likely weaken the currencies.
A Reversal of Flows
If the conditions reported in PMIs actually improve despite the impact of tariffs, this could finally convince markets that the situation isn’t as bad as feared. Remember that the markets initially started to tank way back in mid-February when the Fed’s GDPNow showed the US economy would contract by over 2.0% in the first quarter. Since then, it has been revised (including the effect of gold buying) to be essentially flat. Not fantastic, but certainly not as bad as feared.
Risk sentiment might have gone too far into safe havens, and a positive round of global PMIs might be the first step to resolving that. Particularly if accompanied by strong corporate earnings. This could reverse moves seen in the yen, dollar and Swiss franc. On the other hand, underperformance in the PMIs could convince markets they were right to sell. That keep risk appetite at bay, further bossing safe havens.
