Aside from the running war theme, Trump’s tariff policy comes back to front as well
Markets
The first high-level in-person talks between the US and Russia since the 2022 invasion in Riyadh went well according to the parties involved but offered nothing concrete. The talks were merely explanatory. The fact they happened without Ukraine and the EU sparked outcry from both and prompted a handful of EU leaders into a crisis meeting on Monday to discuss upgrading the European defense capacity. Polish PM Tusk said that (funding) measures would be presented in time for an upcoming March 20-21 summit. We wouldn’t be surprised if something came up sooner given the sense of urgency, provided German coalition building goes smoothly after this Sunday’s elections. French president Macron has called a second meeting for today, involving several EU and non-EU states. Negotiations center around having a UN-mandated “peace-keeping operation” in Ukraine to uphold any future ceasefire/peace deal. The war theme stays at the center of attention but markets are wary to frontrun on any outcome for the time being. Monday’s slide by European bonds in anticipation of significantly increased defense spending eased yesterday. German rates gapped higher at the open but pared gains afterwards to close virtually unchanged. UST’s caught up during their first trading day of the week by adding between 4.7-7.5 bps across the curve yesterday. The US dollar held the upper hand. EUR/USD fell to 1.0446, DXY bounced back to 107. Sterling appreciated on an across-the-board beat by the labour market report. EUR/GBP lost 0.83 and withstood overall USD strength (GBP/USD 1.261). Next up in the UK: CPI. Headline inflation only dropped 0.1% m/m, pushing up the yearly figure to a quicker-than-expected 3%. Core CPI jumped to 3.7% from 3.2% and services inflation to 5% from 4.4%. Bank of England governor Bailey flagged the inflation spike in a speech yesterday and warned not to read too much into it. It explains this morning’s muted GBP reaction. UK money market pricing barely changed and sticks to just two rate cuts for all of 2025.
Aside from the running war theme, Trump’s tariff policy comes back to front as well. The FX ex. USD market isn’t impressed by a renewed (car, pharma & chip) import tariff threat by Trump late-yesterday though. The president said an announcement could come April 2, offering time to hammer out a deal. The greenback trades on the backfoot against all G10 peers. The eco calendar further contains the January Fed meeting minutes. The slew of policymakers since that gathering that came to cement the long pause suggests a broad consensus and means the minutes probably have little surprising or new to offer. We assume technically inspired FX and FI trading.
News and views
The Reserve Bank of New Zealand today reduced the policy rate further by 50 bps to 3.75%. The move was largely expected. CPI inflation remains near the midpoint of its 1-3% target band (0.5% Q/Q and 2.2% Y/Y in Q4). Firms’ inflation expectations are at target and core inflation continues to fall towards the target midpoint. The economic outlook remains consistent with inflation remaining in the band over the medium term. Economic activity remains subdued and spare productive capacity and domestic inflation pressures continue to ease. Price and wage setting is adapting to a low-inflation environment. The RBNZ expects economic activity and employment growth to recover this year, but there is a high degree of uncertainty, amongst others due to trade. The RBNZ governor indicated that the RBNZ might ease policy a bit faster than indicated earlier, with follow-up rate cuts (25 bps) in April and May. The Monetary policy report sees the policy rate on average near 3.1% in Q4. The NZ 3-y bond yield initially dropped after the decision but current trades little changed near 3.85%. The kiwi dollar made a similar move, reversing an earlier decline after governor Orr’s press conference, currently even trading slightly higher at NZD/USD 0.573.
BoJ Board member Takata in a speech today advocated that the bank should continue to consider gradual further rate hikes to contain upside inflation risks. With long-term inflation expectations rising and companies more actively passing on costs, conditions for further policy normalization are falling into place. Maintaining expectations for interest rates to stay low for a prolonged period of time might overheat the economy and financial activity. He indicated that it is difficult to estimate a neutral policy rate and finds it problematic for the Bank to announce a certain level of the neutral policy rate. It could be seen as pre-committing and would reduce the bank’s policy flexibility. At 1.435%, the 10-y Japanese government bond yield this morning touched the highest level since 2009.
Author
KBC Market Research Desk
KBC Bank
