GERMANY: Chancellor Merz To Hold First Call w/China's Xi At ~12:00CET

Initial market reaction to the softer-than-expected flash PMIs sees gilt futures hit fresh session highs at 92.95, adding a little over 20 ticks vs. pre-data levels, before fading back to 92.80.

• Next resistance in the contract located at 93.00, followed by a Fibonacci retracement (93.44).
• Yields 3.5bp higher to 9bp lower, twist flattening bias intact. Long end yields fail to retest early session lows.
• BoE-dated OIS covering ’25 meetings little changed to 1.5bp more dovish vs. pre-PMI levels, with ~92bp of cuts showing through year-end. Recent range extremes of ~97bp of cuts over that horizon remains untested/intact.
• SONIA futures also rally before fading a little, last -3.0 to +1.0, strip twist flattens.
• Cycle highs set earlier in April/yesterday (dependent on contract) are untested.
• Alongside the new daily highs in Gilts, EUR/GBP rallies to touch 0.8578 before fading somewhat - the 15-minute candle chart isolates 0.8587 as resistance, the downtrendline drawn off the Monday AM high.

The Eurozone-wide services PMI was 49.7 (vs 50.5 cons, 51.0 prior). While the miss was expected given the weaker-than-expected French and German data earlier this morning, the smaller deviation from consensus (compared to FR/GE) suggests the EZ ex-France and Germany was a little better than expected. 

• We estimate the German/France composite services PMI at 48.0 (vs 49.6 prior), with the ex-German/France composite at 52.7 (vs 53.3 prior).
• The manufacturing reading was 48.7 (vs 47.4 cons, 48.6 prior). We estimate the German/France composite manufacturing PMI at 48.1 (vs 48.4 prior) and the ex-German/France composite at 49.5 (vs 48.9 prior).
• The composite EZ reading was 50.1 (vs 50.2 cons 50.9 prior), the lowest since December.

Key notes from the EZ-wide release (focusing on ex-German/France comments):

• “The rest of the Eurozone continued to record solid growth of output, albeit with the pace of expansion easing slightly from that seen in March”.
• “Companies were generally reluctant to expand output given a further reduction in new orders during April”…” New export orders (which include intra-Eurozone exports) also decreased, and at a broadly similar pace to that seen for total new business”
• “April saw a sharp drop in business confidence in the euro area”…” . The drop in confidence was widespread, both in terms of sector and geographical coverage”
• “A solid reduction in manufacturing staffing levels outweighed a modest and slower increase in workforce numbers in the service sector. Continued falls in employment in the largest two Eurozone economies cancelled out job creation elsewhere”.
• “Cost inflationary pressures waned at the start of the second quarter”…” Inflation was centred on the services sector”.
• “Selling prices were raised across both monitored sectors”.

A few things to note in the UK flash PMIs. First a notable miss for services at 48.9 versus 51.5 expected. That is a 27-month low according to the press release. Output prices increased at the fastest pace for "nearly two years" with input costs the highest since Feb23. This in itself isn't surprising for this month as the NIC and NLW increases both took effect in April (which increased the costs of employing some people by more than 10% in aggregate). On the employment side firms reported not replacing voluntary leavers - but there wasn't such a mention of redundancies in the press release. Service output declined "marginally" and manufacturing export new orders were the lowest since Feb09. Overall, little to be positive about in this release.

Highlights from the press release:

• "Average cost burdens increased at a sharp and accelerated pace in April. The overall rate of input cost inflation was the fastest since February 2023. Survey respondents mainly cited higher National Insurance contributions and a rise in the National Living Wage. Output charge inflation also picked up in April and was the highest for nearly two years. This was driven by a particularly steep acceleration in factory gate price inflation."
• "Decreased workloads and rising payroll costs contributed to employment cutbacks across the UK private sector in April. Staffing numbers have now decreased for seven months running, reflecting ongoing job shedding in both the manufacturing and service sectors. Survey respondents widely noted that squeezed margins had resulted in the non-replacement of voluntary leavers."
• "Service providers recorded a marginal decrease in business activity during April, which ended a 17-month period of expansion. Rising global economic uncertainty and subdued domestic demand conditions were cited as the main factors weighing on output."
• "Manufacturing export sales were particularly hard-hit by rising global trade tensions. Aside from the pandemic, the latest decline in new orders from abroad across the manufacturing sector was the steepest since February 2009."