Morning Report
Today's economic developments and market movements.
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Key themes: US tariffs continued to dominate the news flow – President Donald Trump announced that the US is going to impose a 25% tariff on steel and aluminium imports.
Following the sell at the end of last week, equity markets were quite resilient. Technology sector led the gains in the US equity markets. Domestic equities sold off on the concerns of the tariffs impact.
US Dollar appreciated 0.3% against a basket of major currencies, but AUD managed to post a small gain 0.1%. Global government bonds rallied.
Oil prices rose by about 2% off stronger demand from Europe, and metal prices headed higher reflecting the expected impact of the US tariffs.
Share markets: News headlines about the US import tariffs on aluminium and steel spread the risk-off sentiment in Asian and Australian equity markets yesterday. Domestically, miners were hit the hardest dragging the ASX200 index 0.8% lower in the morning session. It recovered somewhat later on to finish the day 0.3% in red. After the sell-off at the end of last week, European and the US markets were more resilient to the news about the US tariffs. Support from higher oil prices helped the European Eurostoxx50 to advance 0.6%. Meanwhile, the US markets were led by a tech sector, while the materials producers, which should benefit from the tariffs, also gained to leave the S&P500 0.7% higher on the day.
Interest rates: It was a relatively quiet day in major bond markets. The US Treasury curve steepened slightly, with the 2Y yield falling a basis point, and the 10Y rising a touch to 4.50%. In Europe, Bunds lost 1-2 basis points across the curve, helped by European Central Bank President Lagarde’s comments about easing inflation, while Gilts yields were also down, mainly at the short end. Australian government bonds sold off across the curve, with the 10Y yield up 4 basis points to reach 4.40%. Ahead of next week’s RBA policy decision, the OIS curve continues to suggest more than 90% chance of the policy rate cut in that meeting.
Foreign exchange: Following the last week’s depreciation, USD moved higher again at the start of this week, settling at 108.3, up 0.3% from last’s week’s close. Tariff story was a major tailwind, but the upside was limited as the market focus shifted towards the US CPI release and Fed Chair Powell’s testimony at the congress later this week, which might bring some new insights into the debate about the US monetary policy path over the course of this year and beyond. Despite stronger USD, AUD was little changed, at 0.6280, while EUR lost 0.2% easing back to 1.030.
Commodities: Crude oil price jumped around 2% with signs that Russian production and exports are being impacted by the more aggressive round of sanctions announced in January. At the same time, surging gas prices in Europe are lifting demand for heating oil in the region. Meanwhile, In its virtual meeting, OPEC’s JMMC left major oil-production plans unchanged.
Metals jumped again on yesterday’s news of Trump confirming he will announce across the board 25% tariffs on steel and aluminium, with aluminium rising 1.3%. Gold rose to a fresh record high of $2,911.72. News that China approved a pilot program allowing 10 insurance companies to invest up to 1% of their assets in gold bullion added to demand for metal. The threat of 25% tariffs on steel imports into the US had little impact on iron ore prices in Asia
Australia: There were no notable economic data releases yesterday.
Euro area: Euro area Sentix investor confidence improved in February, with the headline survey index rising by 5pts to -12.7, a level where it was in November before a deterioration to the lowest level in about a year in December and January. The index for current climate improved by 4pts, but it was outperformed by expectations about the economy six months ahead which was up 6points suggesting that investors are a bit more confident about the euro area’s ability to generate growth but also deal with the likely increase in the import tariffs in the United States.
Some of the risks from import tariffs were highlighted by European Central Bank President Christine Lagarde in her testimony to the European parliament. She spoke about challenging economic environment. On inflation, she was confident that the euro area inflationary pressures are easing, which should allow the ECB to meet its inflation target this year. But she told the parliament that inflation outlook is less certain now, because of the effects of trade frictions.
United States: Tariffs where in the news headlines again yesterday when US President Donald Trump announced that he will impose 25% levy on steel and aluminium inflows. The United States imports these metals mainly from Canada, Mexico, Brazil, China, and UAE. Australia also exports them, but they comprise only a very small share of total Australian exports to the United States. While the US tariffs might have a significant effect on their global prices and trade flows, the direct impact on Australian economy from these measures should be relatively minor.
The NY Fed Survey of Consumer Expectations showed that inflation expectations remained stable at the start of this year with consumers expecting 3%yr price increases over the coming twelve months, unchanged pace from December and the average of 2024. Expectations at the 3-year horizon were unchanged at 3%yr, which represents the highest level in more than a year for this measure, while at 5-year horizon they increased 0.3ppt to 3%yr. The NY Fed Survey results were in contrast with a similar inflation expectations measures reported recently by the University of Michigan survey, which showed a notable for the near-term inflation gauge. Market-based measures for inflation expectations are also up, with the 5Y breakeven rate up by more than 20bp since the start of the year.
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