Markets
The first session of the Easter trading week evolved relatively quietly especially when compared to last week’s turbulence. US assets got some reprieve. Daily changes on the US yield curve ranged between -6.2 bps (30-yr) and -14.9 bps (5-yr). US Treasuries found some support in comments by Fed governor Waller who returned to the 2021-2022 playbook by calling the resulting inflation spike from Trump’s tariff policy as likely to be transitory. He outlined two potential scenarios, one with an average US tariff rate of 25% through 2027 and one where the average rate is negotiated down to 10%. In the latter, his base case, he expect inflation to peak close to 3% with the US economy able to withstand the growth hit. The Fed should stay put with rate cuts later this year on the table (“good news” cut scenario). In the adverse scenario, inflation is likely to peak near 5% with a significant slowdown in the economy prompting a spike in the unemployment rate. In that case, Waller argues that the Fed should start cutting rates sooner and to a greater extent in response to the deteriorating economy (“bad news” cut scenario). Waller’s comments contrast with weekend views by Minneapolis Fed Kashkari who ruled out interest rate cuts as an insurance policy against an economic slowdown instead focusing on keeping inflation expectations anchored. Atlanta Fed Bostic thinks that the uncertain outlook puts the Fed and the economy in a “big pause position”, targeting just one policy rate cut this year. US Treasury Secretary Bessent after market close also tried to sooth (Treasury) market stress by pointing out increased foreign demand at recent auctions (vs rumoured sovereign selling) and by showing readiness to act if necessary to improve liquidity (eg by expanding the buyback program for older, off the run, securities). US stock markets recovered between 0.5%-1% yesterday, helped by president Trump’s suggestion to temporarily exempt tariffs on imported vehicles and parts to buy manufacturers time in relocating production. Over the weekend, a similar exemption was given to some electronics. On the one hand, short-lived product exclusions are becoming part of the improvised tariff policy. On the other hand, probes into semiconductor and pharmaceutical imports are a prelude for more sectoral tariffs. EUR/USD traded volatile to close in the middle of the 1.13-1.14 day range. The eco calendar was thin and had no intraday impact. The NY Fed survey was the sole datapoint. It nevertheless showed short-term (1-yr) inflation expectations rising from 3.13% to 3.58%, the highest level since September 2023.
Risk sentiment remains more constructive this morning in Asian dealings. The ECB’s lending survey, German ZEW investor confidence, the US empire manufacturing survey and US import/export prices are on tap. We expect them to play second fiddle and look at the equity market for guidance. We continue to err on the side of caution and don’t think we’re already set for a sustained risk rebound. UK labour market data were close to consensus this morning and don’t effect sterling. EUR/GBP finds a bid near 0.86.
News & Views
UK’s British Retail Consortium said that retail sales in the period between March 2 and April 5 rose by 1.1% y/y and 0.9% when the same stores are polled. BRC noted this March figure is artificially lower due to the timing of Easter in 2024 (March) and this year (April) and its chief executive said that the numbers therefore mask signs of underlying strength of demand. Food sales rose 1.6% and will probably get a boost in the next update. The non-food category registered a 0.6% increase with the improving weather having made for a particularly strong final week (gardening, DIY equipment). BRC did warn for the government’s tax increase to be passed on to consumers later this year, triggering an inflation uptick and potentially capping consumer spending again.
South Korea upped a support package created last year by around 25% to KRW 33tn for its critical semiconductor industry. The government decided to do so in the face of growing uncertainty originating from US policy and rising competition from China. For the same reasons it also hiked a financial assistance programme for the sector to KRW 20tn. The news comes after the US late yesterday initiated probes into semiconductor as well as pharmaceutical imports for national security reasons. They are seen as the precursor to actual import tariffs.
