Morning from Copenhagen.

The ultimate reversal of tariffs—and what increasingly looks like the endgame—is underway. But market sentiment now hinges on whether trade deals continue to roll in following the temporary agreement between the U.S. and China.

While the biggest and most important trade deal appears to be out of the way, the U.S. is clearly adopting a tougher approach toward Europe. Bessent said this morning that “the bloc suffers from a collective action problem,” a pointed signal that Europe is now a lower priority. It wouldn’t be surprising to see European risk assets give back some recent gains over the coming days—especially if there’s no news indicating that negotiations with Europe are starting.

This aligns with our European nowcast model, which shows growth falling sharply from recent highs. As the U.S. finalizes deals with the UK, China, and possibly other Asian countries, the urgency of securing a European deal diminishes. Particularly as the U.S. flirts with the idea of a services tariff, it’s clear Europe is becoming less of a focus.

When examining the U.S.’s main imports from Europe—medicine, industrial machinery, vehicles, and electronics—it becomes clearer why the U.S. may be dragging its feet. Trump’s ongoing “drug price war” plays into this, and many of these goods could be sourced elsewhere, giving the U.S. leverage to delay or deprioritize a deal.

We saw a fascinating market reaction to the China tariff deal yesterday. Equities rose, SOFR contracts fell across expiries, bond yields moved higher, and inflation swaps declined. In essence, the market is saying the Fed will hold rates higher for longer—and in doing so, contain inflation. Markets have clearly priced in better growth and virtually zero recession risk. They’ve also capitulated on the notion that the Fed will deliver three cuts by December. This has been evident in the way the December SOFR contract was bid every time the June, July, or September contracts sold off—on the logic that if the Fed didn’t cut now, it would have to cut more later. That narrative now seems to be fading.

We get the CPI report in just a few hours. The broad consensus calls for 0.3% MoM in both headline and core, but the forecast range is unusually wide—from –0.1% to +0.6%. That’s a massive spread, and it tells us that only a clear dovish surprise will likely move markets. Inflation fixings sit at 0.14% MoM—rounded up to a “hot” 0.1%—which further raises the bar for a surprise. Despite volatile sentiment, markets aren’t really bracing for major inflation swings until July or August.

Chart 1a: Inflation Fixings YoY %