Morning Report
Today's economic developments and market movements.
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Key themes: Most major equity markets sold off and USD strengthened slightly on the back of the news headlines about additional US import tariffs on car, semiconductor and pharmaceutical imports.
The US-Russia talks and Trump’s attack on Zelenskyy added to the negative sentiment in Europe and globally.
The FOMC minutes did not bring any major insights reiterating the message that the Fed needs to see more evidence on disinflation before cutting interest rates further.
Share markets: Equity markets were in a downbeat mood following the news announcements that the US is going to impose 25% tariffs on automobile, semiconductor and pharmaceutical imports. In Asian trading hours, Japanese Nikkei225 was down 0.3%, while Hang Seng lost 0.1%. Domestic equity market also suffered from the global news, with the ASX 200 falling 0.7% towards the low end of the range seen in the last few weeks. The US-Russia talks on Ukraine, which did not include any representatives from Ukraine itself or any other European countries, added to the negative sentiment in Europe. Trump lashed out at Ukrainian President Vladimyr Zelenskyy calling him a dictator. The Euro Stoxx 50 index, down 1.3%, was among the worst performers. The FTSE100 in the UK also ended the day in red, down 0.6%. US equity prices held up better, ending the trading session with a 0.2% gain of the S&P500 index as early losses were offset by gains later in the day.
Interest rates: In the bond markets, the US Treasury curve steepened with gains at the short end exceeding those at the long end. The 2Y yield was down 4bp while the 10Y decreased 2bp to 4.53% as the FOMC minutes from the latest policy meeting reiterated that policy makers are in no hurry to cut interest rates further. European government bonds sold off as Isobel Schnabel, one of the most influential voices at the ECB, suggested that the Governing Council may soon be in a position to pause or halt monetary policy easing. The 10Y Bund yield gained 6bp reaching 2.56%. An upside surprise to the January CPI data in the UK encouraged a similar move in Gilts – the 10Y yield there was up 5bp to 4.61%. Meanwhile, Australian government bond market continued to digest the implications of the RBA rate cut on Tuesday. Yields extended the upward move seen following the rate announcement, with the 10Y rising 2bp to 4.52% despite weaker than expected data on wages growth. Bond futures are signalling that yesterday’s increase might be reversed in the early hours of today’s trading.
Foreign exchange: News on the US import tariffs remain at the forefront in the FX markets. Nevertheless, the USD index was little changed ending the day 0.1% higher at 107.2 as markets await further details how the US import tariffs are going to work in practice. Japanese Yen was the best performing currency in G10 strengthen to around 151.5 as the BoJ Board Member Takata said that the BoJ should consider continuing rising interest rates to contain upside risks to inflation. Meanwhile, the risk-off sentiment saw other major currencies depreciating against the US dollar. EUR was down 0.2%, with the hawkish Schnabel’s comment helping to limit losses. GBP depreciated by a similar amount falling back below the 1.26 mark. AUD was also slightly weaker falling 0.1% to 0.6350. NZD was broadly unchanged on the day, despite the RBNZ cutting interest rates, as the markets focused on the fact that the monetary easing cycle in New Zealand might be closer to the end.
Commodities: Crude oil markets initially jumped to fresh one-week highs on supply disruptions but closed towards the lows of the day as the US and Russia agreed bilateral talks and US President Trump branded the Ukrainian President a “dictator”. The March WTI contract settled at $72.3. A draft G7 statement seen by Bloomberg shows that a move to redraw the Russian oil price cap from the current $60 a barrel was being considered to “incentivize [Russia] to negotiate a meaningful peace” though it’s not clear how many G7 nations will support fresh measures.
Metals were mixed with copper down slightly to $9,467 but aluminium rising up 0.5% as EU ambassadors agreed to move forward with a fresh package of sanctions targeting Russian aluminium through a gradual ban. Foreign ministers are expected to formally adopt the measures next week. Iron ore continued trading above $105 as weather impacted flows support prices. Gold held just below record highs as traders focussed on developments in the US-Russia relations and Trump’s comments directed at Ukraine.
Australia: The Wage Price Index (WPI) rose 0.7%qtr (0.654% at three decimal places) in the December quarter, below our, market, and RBA expectations. Private sector wages grew 0.7%qtr while public sector wages lifted 0.6%. On an annual basis, WPI growth eased to 3.2%yr, down from 3.6%yr in September. The numbers imply that a significant acceleration in the quarterly pace is required in March and June - to 1.0% and 0.9%qtr - for the WPI to growth in line with the RBA forecast of 3.4%yr growth in June 2025. We think that is unlikely and, therefore, we forecast a more modest 3.0%yr increase.
The Westpac-Melbourne Institute Leading Index, which typically shows a likely pace of economic activity relative to growth trend three to nine months into the future, rose 0.58% on a six-month annualised basis signalling better growth outlook ahead. The improvement seems to be broad-based - for the first time since June 2021 all eight major subcomponents feeding into the Leading Index contributed positively. Indicators relating to consumers, dwelling construction and commodity prices were the most important drivers.
New Zealand: As expected by financial markets and strongly signalled by policy makers in advance, the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 50bp to 3.75%. The new projections showed the OCR ending this year at 3.10%, significant downward revision from 3.55% previously. Despite the expected temporary increase in the headline inflation later this year, the tone of the communication remained dovish. Among key downside risks to growth, the RBNZ pointed to tighter global financial conditions and possible effects from import tariffs and trade disputes.
United Kingdom: Following stronger-than-expected UK wage data release earlier this week, the UK CPI figures also surprised on the upside confirming that inflationary pressures are on the rise again. The headline inflation rate rose from 2.5%yr to 3.0%yr in January, 0.2ppt above market consensus and the Bank of England forecast published earlier this month. The core CPI accelerated to a similar degree, the annual pace lifting from 3.2%yr to 3.7%yr. Services inflation lifted from 4.4%yr to 5.0%yr, largely as expected, so the upside surprise was accounted for mainly by goods and food prices. Looking ahead, with higher energy prices and weaker sterling adding to inflationary pressures, the headline CPI is likely to increase further later this year, before easing back towards the BoE’s target of 2%.
United States: President Trump said he would impose 25% tariffs on automobile, semiconductor and pharmaceutical imports into the US. According to Trump, the new levies will come into force in early April and will apply on top of the tariffs announced previously. It remains to be seen how they will interact with reciprocal tariffs, which were meant to create a level playing field. Among the trading partners, Mexico, South Korea, Malaysia, Japan and a few European countries seem to have biggest exposures through their exports of these goods to the US.
The minutes of the January FOMC meeting emphasised the Committee’s previously telegraphed beliefs over inflation and the labour market. Most notably that, with appropriate monetary policy, inflation would continue to decelerate to target in time and that the labour market was not a source of inflationary pressure, with demand and supply roughly in balance. Still, considerable uncertainty remains over the path of inflation given potential changes to US trade and immigration policy. Many participants therefore “emphasized that additional evidence of continued disinflation would be needed to support the view that inflation was returning sustainably to 2 percent”. A few also noted “the federal funds rate may not be far above its neutral level”, arguing for caution while inflation is above target. It will be some time before the new administration’s policies are fully known let alone the implications understood.
On the economic data front, US housing starts reversed course in January, declining 9.8% after December’s 16.1% gain. Building permits meanwhile edged 0.1% higher after declining 0.7% in December. Starts and permits are both currently close to the average of the past five years.
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