Morning Report
Today's economic developments and market movements.
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Key themes: There was a sea of red across global equity markets as investors continue to price risks associated with the escalating trade war.
On Friday President Trump announced reciprocal tariffs on “everyone,” with further details provided this week. The impact of the recent announcements is clearly impacting consumer sentiment and more worryingly for the Fed, inflation expectations.
Higher inflation expectations, coupled with a solid labour market read, saw bond yields generally increase. The US dollar also ticked higher on the back of yield support and as the growing uncertainty supported haven flows.
Share markets: There was a sea of red across global equity markets with investors assessed the possible fallout from the escalating trade war. After a positive start to the session on Friday, US stocks tanked as reports emerged of President Trump’s plan to impose reciprocal tariffs on “everyone.” This coupled with economic data which showed inflation expectations had spiked, also saw volatility increase with the VIX increasing to almost 17pts.
The S&P 500 and the Dow Jones both closed 1.0% lower. Both indices also finished the week in the red, down 0.2% and 0.4%, respectively. The Nasdaq closed 1.4% lower and finished the week 0.5% in the red.
It was a similar story in European markets, which were drifting around record highs before news of reciprocal tariffs emerged, hitting risk sentiment. The Euro Stoxx 50 closed 0.6% lower, the FTSE 100 was down 0.3%, while the DAX finished 0.5% lower.
Markets were also generally lower across Asia, except for the Hang Seng which finished 1.2% higher supported by gain in Chinese tech stocks. On the other hand, the ASX200 index closed 0.1% lower to end the week down 0.2%. Five of eleven sectors were lower, led by health care stocks. Futures are pointing to a negative open this morning.
Interest rates: Yields were also generally higher with the US curve shifting higher. The 2-year bond yield increased 8 basis point to 4.29%, while the US 10-year bond also increased 6 basis points (after been up by as much as 8 basis points) to 4.49%. Money markets are pricing in around 35 basis points of cuts through 2025 – much lower than the 44 basis points priced in last Thursday.
Yields were mixed across Europe, with the 2-year and 10-year Bunds down around 1 basis point to 2.0% and 2.4%, respectively. In the UK, 2-year and 10-year Gilt yields were also around 1 basis point lower at 4.2% and 4.5%, respectively.
The Aussie yield curve shifted higher. The 3-year and 10-year futures yield increased four and three basis points to 3.81% and 4.42%, respectively. The first full rate cut is expected by April 2025, with around an 92% chance of a cut in February. There are around 87 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index was 0.3% higher on the back of yield support and as risk sentiment took a hit. The DXY reached a high of 108.32 before easing to close at 108.04. The US dollar seems to have found a new base at around 107.0 with US CPI and Fed Chair Powell’s semi-annual remarks later this week potentially pushing the US dollar higher into the 109s.
The Aussie was 0.3% lower mirroring movements in the US dollar. With limited top tier domestic data this week, movements in the Aussie will reflect changes in the US dollar leg given significant risk events there, including the US CPI. Ongoing tariff risks remain and sharp moves in sentiment could also see the Aussie come under selling pressure.
The euro underperformed, falling 0.7% against the Greenback. Further downside exists particularly given the US President’s recent tariff announcement, which looks very likely to target automobiles. The Pound also continued to lose grown against the Greenback, finishing the week 0.7% lower.
Commodities: Crude markets stabilised on Friday but finished the week lower as oversold prices offset the negative impact of President Trump’s trade wars on global demand. The West Texas Intermediate (WTI) futures increased 0.6% to US$71.00 per barrel.
Metals jumped with copper 1.3% higher to reach US$9,300. The surge has been helped by concerns that Trump will include copper in across-the-board tariffs, bringing forward sales. Copper gained almost 4% last week. This was despite record global production, trade wars hitting demand and a sharp rise in global inventory levels.
Iron ore continued its steady march above US$105 a tonne, rising to a 4-month high above US$107. The move appears to be helped by an improvement in demand as steel firms look to restock after the LNY vacation.
Gold hit fresh record highs above US$2,900 Friday, helped by trade war confusion and record official sector buying. The World Gold Council reported that central banks bought 1,045 metric tons of gold last year, with Poland, India and Turkey the biggest buyers.
Australia: There were no significant data releases on Friday.
Japan: Real household spending increased 2.7%yr in December, from the fall of 0.4%yr recorded in November. This was well above the 0.2%yr gain expected by the market and the first growth in five months. Over the month of December, spending increased 2.3%mth supported by higher wages and winter bonus. While the monthly outcome was stronger than expected, it was largely supported by bonuses. Over the next few months, we will get a clearer view of the underlying impulse.
China: Annual inflation increased 0.5% in January, up from the 0.1%ye recorded in December. This was higher than the 0.4%yr expected by the market and the strongest outcome since August. In monthly terms, consumer prices increased 0.7%mth, up from the flat read in December. Services inflation accelerated to 1.1%yr, with recreation & education and medical recording solid gains.
Producer (or wholesale) prices declined 2.3%yr in January, unchanged from the fall recorded in December and slightly worse than the 2.1%yr decline expected by the market. In monthly terms, produced prices declined 0.2%mth following a fall of 0.1%mth in December. Elevated capacity and declining input prices continued to lead to price declines, with produced prices now falling for almost two and a half years.
United States: The labour market read was benign and suggests that the labour market broadly remains in balance. Job gains moderated pointing to easing in conditions, with average earnings ticking higher but remaining consistent with the Fed’s inflation target given recent productivity outcomes. Inflation expectations increased significantly, particularly in the near term but also out further, with economic conditions also deteriorating compared with a month ago. This suggests that uncertainty triggered by the incoming US President is weighing on consumers and could spill over into spending decisions, price setting and wage negotiations.
On the trade front, President Trump plans to unveil reciprocal tariffs this week, affecting “everyone”, to ensure the US is treated evenly. Trump made the announcement during a meeting with the visiting Japanese Prime Minister on Friday. It is understood the President is considering tariffs on automobiles.
The University of Michigan consumer sentiment index declined to 67.8pts in February, from 71.1pts in January. The current conditions index declined a significant 5.3pts in February, with the forward expectations sub-index also down 2.8pts. Most telling, the 1-year inflation expectations series rose 1ppt to 4.3% in February, from as low as 2.8% in December 2024. The 5-year ahead inflation expectations also ticked higher to 3.3% in February, from 3.2% in January and 3.0% in December, and is now at its highest level since the GFC. Consumers are clearly showing concerns over the inflationary impacts of tariffs and the potential for these impacts to continue going forward.
Gains in nonfarm payrolls moderated to 143k in January, following the revised gain of 307k in January (from the initial estimate of 256k). The outcome was softer than the 175k expected by the market. Job gains over the month were recorded in health care, retail trade, and social assistance. Annual revisions show job gains averaged 166k a month over 2024, down from the 186k initial estimate.
Average hourly earnings increased 0.5% over the month of January, a step up from the 0.3%mth expected by the market and recorded in December. This was the largest monthly increase since August last year. Growth on average hour earnings increased 4.1% in annual terms, stronger than the 3.8%yr expected by the market and matched the outcome recorded in December. The US unemployment rate dipped by 0.1 percentage point to 4.0% in January. This was slightly lower than the 4.1% expected by the market.
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