Markets
European markets unlike their US counterpart had a pessimistic view on the Fed’s policy decision. While the latter took comfort from chair Powell’s reassuring message during the presser, the former seem to eye the stagflationary risks in the updated forecasts. Stocks, core bond yields and the euro dropped. Sentiment then took a turn for the better around the start of US dealings. News of the EU delaying retaliatory tariffs until mid-April (from April 1) to allow for dialogue helped the turnaround, as did way stronger than expected housing data a bit later. Equities in Europe bottomed though still finished 1% lower in the close. WS shrugged off most of the initial contagion losses during the US session. European yields cut their previous losses in half, ending around 2-3 bps lower in a daily perspective. US rates (almost) fully wiped out declines of up to 7 bps. EUR/USD bounced off 1.082 to close at 1.085. Sterling rose as high as EUR/GBP 0.835 before paring some of those gains to 0.837. The labour market report was a tad better than anticipated and the Bank of England held rates steady. A deeper dive in the 8-1 split vote (one member voting for a cut) showed two policymakers who voted for cuts at all three previous meetings taking a cautious turn by supporting the rates hold. UK money markets pared some of the easing bets from more than to slightly below two rate cuts this year.
Asian (and more specially Chinese) risk-off is set to spillover in some degree to Europe with stock futures pointing at a 0.4% lower open. Risk sentiment will probably remain key for markets in absence of an inspiring economic calendar and ahead of the weekend. We expect technical trading in FX and FI markets. The dollar is trying to build on a bottoming out process with DXY attacking the 104 resistance area. EUR/USD is correcting lower for a third day but should find support around 1.08. The US 10-yr yield holds tight in a narrow sideways trading range while the 10-yr EU swap grinds lower. The January high at 2.63% serves as a strong support. The unpredictable tariff narrative appears to gain some traction again as the April 2 reciprocal date draws closer. The EU’s olive branch yesterday was answered by White House press secretary Leavitt with renewed “big tariff” threats. Yesterday’s EU summit revealed some divisions, first and foremost with Hungary again opposing the €5bn in Ukrainian aid. Southern countries are seeking a broader definition in terms of what to include under “defense spending”, which is exempted for 1.5% of GDP from the deficit rules. French president Macron late yesterday announced a new summit in Paris next week during which he is looking for a coalition of the willing.
News & Views
In a speech in Calgary yesterday, Tiff Macklem elaborated on the difficult context that the central bank is facing due to uncertainty surrounding US tariffs on Canadian imports. The Bank of Canada governor indicated that it could be appropriate for the bank consider a range of economic estimates rather than one single forecast. He also pointed to the dangers of adjusting policy too quickly based on an uncertain outlook. In the current environment policy should be less forward looking until the situation is clearer and then act more quickly ‘when things crystallize’. This at least suggest the BOC is moving to a wait-and-see approach. Macklem nonetheless indicated that there should be no doubt that the BOC stays committed to low inflation. The Bank wants to avoid that higher import costs due to the deprecation of the currency and retaliatory tariffs will spread to consumer prices and affect the anchoring of inflation expectations. The impact of the tariffs war limits the Banks’ room to support the economy. The market currently only sees about a 35% for an additional 25 bps BOC rate cut next month.
British consumers’ moral in March turned slightly more positive for the third consecutive month. The GFK consumer confidence index improved from -20 to -19 to be compared to short-term low of -22 in January. Even so, the indicator remains well below the long-term average near -10. Consumers turned slightly more optimistic about the economic situation, both in the last 12 months (-42 from -44- and also for the next 12 months (-29 from –31). At the same time consumer again turned less positive on their personal finances. “The current stability is to be welcomed but it won’t take much to upset the fragile consumer mood,” Neil Bellamy, consumer insights director at GfK was quoted.
