In Europe, CPI updates from major eurozone economies came in stronger than expected, raising questions about the European Central Bank’s (ECB) ability—or immediate need—to continue cutting rates. The eurozone economy grew by 0.4% in Q1 - dim compared to the US growth figures, but it’s twice as fast as expected. Combined with eurozone countries’ pledges to spend heavily on defense and security, it suggests that part of the growth loss due to the tariff war could be counterbalanced by higher government spending.

Growing through government spending is not ideal, but it may explain the Q1 GDP beat. Still, the EURUSD’s decline despite stronger-than-expected inflation data makes sense if we consider that falling inflation and dovish ECB expectations were major drivers of the euro’s rally against the dollar this year. However, the diverging growth outlook between the eurozone and the US - though mostly priced in - should limit downside corrections in EURUSD. Pullbacks could offer opportunities to strengthen long euro positions. The medium-term bullish trend remains intact above 1.1025 (the major 38.2% retracement distinguishing trend from consolidation).

Back to the diverging growth story: US GDP sharply fell in Q1 (surprise!). The US economy contracted by 0.3% in the first quarter, down from 2.4% in the prior quarter, just before Donald Trump took office again. Sales tumbled 2.5%, down from 3.3%, while a core inflation gauge jumped from 2.6% to 3.5% - well above the 3.1% expected. The ADP report confirmed that jobs are being lost faster than forecast.

In short: US growth contracted and inflation accelerated in Q1. That’s the worst possible combination of data. Not only could the US be heading for a recession, but stagflation may be knocking on the door. That’s why the S&P500 initially dropped 2% after the release - compounded by a wave of cautious earnings statements and companies’ reluctance to provide forecasts amid the uncertain trade backdrop.

Thankfully, the core PCE data - the Federal Reserve’s (Fed) preferred inflation gauge - came in line with expectations year-over-year and was flat month-on-month, helping cool bearish momentum. The S&P500 rebounded to close 0.15% higher on hopes the Fed could cut rates sooner rather than later to support the tariff-hit economy. But should the Fed act, knowing inflation could spike in coming months due to tariff-driven price jumps? Trump himself said kids might end up with “2 dolls instead of 30—and those two could cost a couple bucks more.” But how much more—and for how long?

For now, the declining US 2-year yield suggests that part of the stock rebound is being driven by rising expectations of deeper Fed cuts. The 2-year yield briefly slipped below 2.60% yesterday, down from nearly 4.40% at the start of the year. Meanwhile, the US dollar index marked its third consecutive daily gain. Still, Fed optimism is fragile and increasingly at risk if inflation heats up.

Elsewhere, the Bank of Japan (BoJ) left rates unchanged but slashed its growth forecasts for this year and next. It simultaneously released an updated CPI outlook of 1.9–2% for the next fiscal year, warning that inflation is likely to remain near target despite a slowing economy. This keeps BoJ rate hikes on the table despite growth worries. Interestingly, investors responded to the weaker GDP outlook by pushing the yen lower and lifting the Nikkei above its 50-day moving average—perhaps underestimating the hawkish risks.

The best for last

Let’s enjoy the ride while it lasts. Futures point to a positive US open today, after both Meta and Microsoft posted stronger-than-expected earnings after the bell.

Microsoft’s cloud revenue grew by a third last quarter, confirming that AI demand remains robust despite oversupply concerns. Notably, Microsoft spent less last quarter—for the first time in a while—but that’s not the plan elsewhere.

Meta not only delivered strong sales and advertising revenue (boosted by AI), but also raised its full-year spending plans from $60–65bn to $64–72bn. That’s exactly what AI investors wanted to hear. Both Meta and Microsoft shares jumped in after-hours trading—5.3% and 7%, respectively.

Apple and Amazon report after the bell today and will need to convince investors they can weather US tariffs. Apple has already announced plans to move some production from China to India and to the US. Trump backed off his plan to tax smartphones, after warnings that US-made iPhones could cost up to $3000. Still, Apple remains one of the most tariff-exposed Big Tech names, given its complex global supply chain and lagging AI progress.

Amazon, also highly exposed to tariffs, will likely see its e-commerce revenue pressured by tariffs. Morgan Stanley analysts estimate that 18% of products on Amazon are imported from China, and around 60% of third-party sellers have ‘some China exposure’ that could impact ad spend. But Amazon has cards to play. Its cloud business gives it a stake in the AI race. And the company just launched 27 Kuiper satellites to provide Starlink-style internet to consumers and businesses. From a valuation perspective, Amazon is sitting on its long-term price target—strong earnings could tempt buyers despite the choppy macro environment.