US equity market recorded the steepest daily losses since mid-December and USD depreciated notably as President Trump confirmed that import tariffs on Canada, Mexico and China will go up, and a weaker manufacturing survey added to market concerns about wakening US growth.
European markets rallied and German Bunds sold off as news reported that Germany is taking urgent steps to approve an increase in defence spending.
Crude oil prices declined further as OPEC+ confirmed that oil supply increases will commence next month.
Ahead of today’s deadline where the US is set to impose 25% import tariffs on Canada and Mexico and double a tariff on China to 20%, focus in financial markets remained on the US trade policy. President Trump’s confirmation that the increase in tariffs, postponed from a month ago, will indeed go ahead added to the negative sentiment. Meanwhile, weaker manufacturing PMI provided further support to the narrative of slowing economic growth in the US. In Europe, news headlines suggested that Friedrich Merz, German chancellor-in waiting, is seeking for an urgent political agreement with the SPD, the current ruling party, to approve an increase in German defence spending by €200bn in the current parliament.
• The USD depreciated sharply, losing almost 1% on the back of weakening economic momentum in the US. Tariff headlines helped to limit its losses towards the end of the trading session. The EUR reversed its depreciation in the second half of last week and gained 1%, rising back towards 1.05. Weaker USD supported a rally in the AUD, but the prospects of US import tariffs on agricultural goods, major Australian exports to the US, limited its gains to only 0.2%.
• A rally in the bond markets continued, with the 10Y US Treasury losing another 5bp to 4.16%, down 40bp in around two weeks. Other key tenors across the Treasury curve showed similar changes. Despite lower euro area inflation, German Bunds and other European government bonds bucked that trend and sold off, sending the 10Y Bund yield 9bp higher to 2.49%. Yesterday Australian government bond yields headed higher too. The 10Y was up 3bp to 4.33%, opening up the highest spread to an equivalent US Treasury yield since last November.
• The US equity market sold off, with the S&P 500 index falling 2.3%, the worst daily result since around mid- December. NVIDIA’s share price was down almost 9% on the day. Trading before the latest Trump comments on tariffs, European stocks were on much firmer footing, with Euro Stoxx 50 gaining 1.4%, as the industrial sector, and defence stocks in particular, rallied on the prospects of higher military spending. Domestic and Asian equity price indices headed higher yesterday following gains in the US market on Friday.
• Crude oil price fell significantly – WTI was down 2.3% on the day to $68.2 – as OPEC+ announced that it will start increasing oil supply from 1 April. Metals were surprisingly unfazed by the tariff news, with copper up 0.7% and aluminium gaining 0.2%. Traders were focused on news that China’s may see a new fiscal package announced following the National People’s Congress which commences on Wednesday.
The ISM Manufacturing PMI reported a modest decline in business sentiment in the US. Having risen in the prior few months to reach 50.9 in January, the first reading in expansionary territory since October 2022, the headline index eased by 0.6 points to 50.3, a level still well above the average for the last year of 48.2. Details of the survey painted a picture of rising concerns among US manufacturers about uncertainty and inflationary effects related to import tariffs. The production index was down almost 2 points, while new orders and employment fell more sharply, dipping back below 50. Meanwhile, the prices paid index surged 7.5 points to 62.4, the highest level since mid-2022.
Comments from St. Louis Fed President Alberto Musalem emphasised the importance of keeping inflation expectations in check as US inflation continues to moderate, and the labour market stays near full employment. He reiterated his previous point that monetary policy should remain modestly restrictive until it is clearer that it is on track to hit the 2% target.
Echoing the message of a similar official PMI survey released last week, yesterday’s Caixin manufacturing PMI data in China reported an improvement in business sentiment in February. The headline index rose from 50.1 to 50.8, a level in line with the 2024 average. The result was somewhat surprising, given the concerns over the negative effects of US import tariffs on the Chinese manufacturing sector, including the 10% increase imposed at the beginning of last month and the further 10% rise expected this week.
Having been on an upward trajectory in recent months, rising from 1.7% year-on-year in September to 2.5% year-on-year in January, the euro area HICP inflation eased in February to 2.4%yr. The change in the inflation trend will be welcomed by policymakers at the ECB, albeit the reading was a touch above the consensus expectations and the ECB’s latest Q1 forecast from December, both at 2.3%yr. The core inflation rate was also 0.1ppt lower, at 2.6%yr. While core goods inflation rose to 0.6%yr, it was offset by lower services inflation, which eased from 3.9%yr to 3.7%yr, breaking out of the 3.9-4.1% range it had been in for the last nine months.
