No love in the air!
Describing this as “the big one”, Donald Trump yesterday announced in a social media post that (as previously threatened) he would impose reciprocal tariffs on US trading partners, confirming this later in a press conference after the close of European business. However there will be a delay of weeks, possibly months, before they are implemented (allowing for negotiations in the meantime), which prompted a relief rally in markets with stocks advancing, bond yields falling, and the dollar weakening. The euro and sterling have both gained around half a cent from yesterday morning’s levels against the dollar, trading at about $1.0470 and $1.2570 respectively this morning. EURGBP has remained in a narrow range this week and is currently trading at £0.8330.
The US led a rally in bond markets with 10-year yields declining by almost 10bps on the day, largely reversing Wednesday’s inflation-related spike higher, while equivalent German and UK yields fell by 5-6bps. In equity markets, European stocks performed strongly, adding almost 2%, while US indices closed with gains of around 1%.
According to what is being called the “Fair and Reciprocal Plan”, the Trump administration will determine “the equivalent of a reciprocal tariff with respect to each foreign trading partner”. This will be based not just on the tariffs trading partners impose on US exports, but also on non-tariff barriers, as well as “unfair, discriminatory, or extraterritorial taxes, including a value-added tax, imposed by our trading partners”. White House staff have indicated that reciprocal tariffs will be implemented on a “country-by-country” basis starting with those with whom the US runs the largest trade deficits, while it seems it will be the beginning of April (at the earliest) before they are decided upon.
Regarding the day ahead, in the mundane world of economic data (!), the main releases are Euro area GDP (second estimate) and employment in Q4 2024 as well as retail sales and industrial production (both for January) in the US.