Eurozone Stocks Rise 0.13% Amid Bond Yield Decline US Market Reacts to Trump Tax Bill

Eurozone stocks continued their downward trend, with the Euro Stoxx 50 Index experiencing a slight increase of +0.13% in the morning session. This modest gain was attributed to falling bond yields, which provided some relief to investors. Additionally, better-than-expected economic data contributed to the positive sentiment, albeit temporarily. The market's focus remained on the ongoing fiscal and trade policies, with investors closely monitoring the potential impact on global markets.

In the United States, the market was influenced by the passage of President Donald Trump's tax bill through Congress. The bill, which aims to avert a year-end tax increase, has raised concerns about its potential to add trillions of dollars to the already substantial US deficit. This fiscal uncertainty, coupled with the ongoing trade war and the recent downgrade of the US credit rating, has led to a decrease in the attractiveness of US assets to foreign investors. The market's reaction to these developments was mixed, with the S&P 500 and Dow Jones Industrials posting 1-1/2 week lows before recovering from their worst levels.

The passage of the tax bill has also led to an increase in Treasury yields, which initially put pressure on stocks. However, dovish comments from Fed Governor Waller, who suggested that the Fed could cut rates in the second half of the year if tariffs settle around 10%, provided some support to the market. Additionally, positive economic data, including a decrease in weekly jobless claims and an increase in the May S&P manufacturing PMI, helped to stabilize the market.

The market's focus will continue to be on any tariff news or announcements of new trade deals, as well as the upcoming G-7 finance ministers and central bank governors meeting. The market is also discounting the chances at 5% for a -25 bp rate cut at the next FOMC meeting on June 17-18. The Q1 earnings reporting season is winding down, with almost 90% of companies in the S&P 500 having reported quarterly results, and 77% having beaten estimates. Earnings growth in Q1 is running at +13.1%, compared with just +6.6% expected before the start of the season. Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January.

In Europe, the Eurozone May S&P manufacturing PMI rose +0.4 to a 2-3/4 year high of 49.4, stronger than expectations of 49.2. However, the May S&P composite PMI unexpectedly fell -0.9 to a 6-month low of 49.5, weaker than expectations of an increase to 50.6. The April 16-17 ECB meeting summary was dovish as policymakers expressed concern about the negative economic impact of US tariffs and signaled a bias toward additional monetary easing. Policymakers also said, "Even with the additional spending on defense and infrastructure, it was likely that, on balance, Eurozone economic growth would be worse in 2025 than previously expected." The German May IFO business climate index rose +0.6 to an 11-month high of 87.5, stronger than expectations of 87.3. In its monthly report, the Bundesbank said that after modest growth in Q1, output would probably stagnate in Q2, citing a "wide range of negative factors" that are compounded by US trade tariffs hitting German exporters. Also, "due to the economic downturn, uncertainty about the future economic development, and lower inflation rates, wage settlements are likely to remain significantly lower than in the past two years." The UK May S&P manufacturing PMI unexpectedly fell -0.3 to 45.1, weaker than expectations of an increase to 46.1. Swaps are discounting the chances at 95% for a -25 bp rate cut by the ECB at the June 5 policy meeting.