Morning Report
Today's economic developments and market movements.

Morning Report PDF (PDF 273KB)
Key themes: In a sign of what’s to come, volatility spiked in late trade following the US announcement of tariffs on Canadian, Mexican and Chinese imports from 1 February.
The VIX spiked and major US equity indices gave up gains to finish the session firmly in the red. The US dollar increased sharply, and longer-term bond yields ticked higher.
Over the weekend the impacted trading partners announced that they will take retaliatory actions against the US.
As markets opened this morning, the Greenback continues to appreciate against most G10 currencies including the Aussie which has now fallen to 0.61. The Canadian dollar has fallen to its lowest level since 2003, while the euro and Mexican Peso have also taken a hit of more than 2% against the Greenback.
Share markets: US equity markets were ahead in early trade following the release of benign wages data, with the Nasdaq up as much at 1.5% at one point. Volatility spiked as news broke that the US would impose across the board tariffs on imports from three of its major trading partners (more details under the US section below).
This saw the VIX increase by almost 3pts to above 17pts and equities fall across the board with nine of the eleven sectors finishing in the red. The S&P 500 closed 0.5% lower, the Dow Jones was 0.8% lower and the NASDAQ closed 0.3% in the red.
With markets elsewhere closing before the tariff news broke, major European and Asian equity indices finished higher. The Euro Stoxx 50 closed 0.1% higher, the FTSE 100 was up 0.3%, while the DAX finished flat.
The ASX200 index gained 0.5% on Friday to finish the week 1.5% in the green. Nine of the eleven sectors finished higher, led by materials stocks. Futures are pointing to a negative open this morning.
Interest rates: The US yield curve steepened with the 2-year bond yield down 1 basis point to 4.20%, while the US 10-year bond yield increasing 2 basis points to 4.54%. Money markets are pricing in around 46 basis points of cuts through 2025.
Yields were generally lower across Europe, with 10-year bond yields down 6 basis points to 2.46% in Germany and 2 basis points lower in the UK at 4.54%. Money markets have priced in around 85 basis points of cuts through 2025, following last week’s cut. Markets are expecting the BoE to cut by almost 80 basis points this year.
The Aussie yield curve shifted higher. The 3-year and 10-year futures yield increased three and two basis points to 3.84% and 4.48%, respectively. The first full rate cut is expected by April 2025, with around an 93% chance of a cut in February. There are around 85 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index finished Friday’s session 0.6% higher, reaching a high of 108.565 before falling to a low of 107.785. The DXY was trading at 108.370 at time of writing.
Risk sensitive currencies, including the Aussie, and currencies directly impacted by the trade war are falling in early trade given heightened uncertainty and likely impact on their economies.
On Friday, the Aussie finished broadly unchanged at 0.6218. As markets opened this morning the Aussie has fallen by around 1% against the Greenback to reach a low of 0.6154.
The euro has tanked against the Greenback more than 2.0% this morning to 1.0211, its lowest level since 2022, with the US president stating that he will “absolutely” impose tariffs on the EU. The British Pound is also down 1% this morning against the Greenback. The Canadian dollar has fallen to its lowest level since 2003.
The Yen outperformed, with the USD/JPY down by 0.4% this morning to 154.77. Following the rate hike two weeks ago, money markets are currently pricing in one more rate hike this year.
Commodities: Crude markets are rising as US President Trump’s trade wars commenced. The March WTI contract rose 1.6% to US$73.70. About 40% of the crude consumed in the US comes from abroad with 60% of that from Canada and 11% from Mexico. Analyst have warned that if sanctioned oil supply falls, the Brent price could rise to US$93.
Metals were lower across the board with copper down 0.9% and aluminium down 1.24%. The Aluminium Association said in a statement that “to ensure that American aluminium wins the future, President Trump should exempt the aluminium metal supply needed for the American manufacturers, while continuing to take every possible action at the US border against unfairly traded Chinese aluminium”.
Iron ore markets remained above US$105 a tonne with with news that China will be tariffed seeing recent supply disruption related gains.
Australia: Producer (or wholesale prices) increased 0.8%qtr in the December quarter 2024, to be 3.7% higher in annual terms. Growth in annual terms has eased for two consecutive quarters. Housing construction input costs increased 0.5%qtr to be 1.6% higher in annual terms, where it has been for the past four quarters. Softer growth in input costs is now clearly showing up in lower growth in output costs (or costs of new dwellings), which grew 4.3%yr in the December quarter, the softest since the September quarter 2021. Notwithstanding the decline, the ABS notes that “activity in the non-residential market, coupled with pressure from the residential and civil construction sectors, continued to drive competition for limited resources such as labour.”
Private credit increased 0.6%mth to be 6.5%yr in the month of December. Business credit continues to outperform growing 0.8%mth to be 8.9% higher in annual terms – well above the pre pandemic average. There was also a slight step up in housing credit which grew 0.5%mth to be 5.5% higher in annual terms.
Eurozone: Preliminary estimates showed that the harmonised inflation rate in Germany remained unchanged at 2.8%yr in January. This was in line with market expectations and the outcome recorded in December. In monthly terms, headline inflation declined 0.2%mth, following a 0.7%mth increase in December.
Japan: Inflation in Tokyo (a leading indicator for broader inflationary pressures) increased 3.4%yr in January, a step up from the 3.1%yr recorded in December and the 3.0%yr expected by the market. This was the fastest increase in almost two years, in part driven by an acceleration in food prices. The core measure of inflation, excluding food, increased 2.5%yr, in line with market expectations and a touch higher than the 2.4%yr recorded last month. This was the fastest pace in a year.
Labour market data suggest that the market remains resilient. The jobless rate ticked down to 2.4% in December, from the 2.5% recorded in November and expected by the market. Employment increased by 140k to a new peak of 68.2mil over the month. The job to applicant ratio remains unchanged at 1¼ in January (i.e. there were 125 job openings for every 100 job seekers).
Industrial output increased 0.3%mth in December, following the 2.2%mth drop in November. This was a touch higher than the 0.2%mth the market was expecting. Semiconductor and electronic device output drove the gain, reflecting strong global demand for chips.
United States: President Trump signed orders over the weekend to impose tariffs of 25% on Mexico and non-energy Canadian goods, 10% on Canadian energy, and a 10-percentage point increase to tariffs on China. Estimates suggest that this will affect trade worth about $1.3 trillion, representing 43% of US imports and close to 5% of US GDP.
The three partners have vowed to retaliate. Canada announced 25% tariffs on $106 billion worth of goods, representing about 40% of its goods imports from the US. Mexico and China have both pledged retaliations, with limited detail at this stage.
The employment cost index increased 0.9%qtr in the December quarter, in line with market expectations. Compensation costs grew at a faster pace in the private sector, while they slowed for the public sector over the quarter. In annual terms the employment cost index was 3.8% higher, slightly down from 3.9%yr recorded in the September quarter 2024 - this was the softest annual growth since the September quarter 2021. Growth in employment costs remain consistent with the Fed’s inflation target given recent productivity outcomes.
Personal income rose 0.4%mth over the month of December, in line with market expectations. The gain was driven primarily by employee compensation, which rose 0.4%mth, slightly lower than the 0.5%mth recorded in November.
Growth in personal spending accelerated to 0.7%mth which was stronger than the 0.5%mth expected by the market. The November outcome was also revised higher from 0.4%mth to 0.6%mth. Robust growth in spending (particularly looking at household durables) could reflect a behavioural response from the US consumer ahead of the imposition of tariffs, which will increase the price of imports.
The personal consumption expenditures (PCE) deflator increased 0.3%mth over December, in line with market expectations. The core PCE deflator (which excludes food and energy costs) increased 0.2%mth, also broadly in line with market expectations. In annual terms, the core PCE deflator remained at 2.8%yr for a third straight month. However, on a six-month annualised basis it is running at 2.3%yr, edging lower towards the Fed’s 2.0%yr target.
The Chicago PMI rose to 39.5pts in January, up from the 36.9pts recorded in December. This was slightly below the 40pts expected by the market. Despite the increase, this latest outcome remains below the 2024 annual average. New orders and production increased while employment dropped to the lowest level recorded since June 2020. President Trump signed orders over the weekend to impose tariffs of 25% on Mexico and non-energy Canadian goods, 10% on Canadian energy, and a 10-percentage point increase to tariffs on China. Estimates suggest that this will affect trade worth about $1.3 trillion, representing 43% of US imports and close to 5% of US GDP.
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