Another cat among the pigeons
Markets are digesting Donald Trump’s weekend threat to impose a 10% tariff on eight NATO allies (six EU countries and two non-EU countries) involved in the deployment of a small number of military personnel to Greenland at the end of last week – which he says poses a risk to ‘global peace and security’ – rising to 25% and remaining in place until a deal is reached to ‘purchase’ the territory. However, as per Trump’s usual playbook, the 10% tariff won’t kick in for a couple of weeks until February 1st (and the 25% tariff not until June), which allows room for ‘negotiation’ in the meantime. The EU says that, while tariffs are ‘incompatible with the EU-US trade agreement’ (reached last August), it is ready to defend itself against “any form of coercion.” EU heads of state are preparing to meet ‘in the coming days’, suggesting they are keen to avoid any knee-jerk rection to Trump’s latest tariff threat. The latter is weighing a little on the dollar this morning. EURUSD is trading at about $1.1620, having closed just below $1.16 on Friday, while GBPUSD is hovering around $1.34, marginally firmer than Friday’s closing level. This sees EURGBP kick off the week at about £0.8675.
European equity markets have opened in the red following the weekend’s developments with the Euro Stoxx 50 down around 1%, more than reversing last week’s gains. Euro area government bond yields are slightly lower – mostly at the short-end of the curve amid a marginal firming of ECB rate cut expectations – extending last week’s decline. Japanese yields have spiked higher overnight, to levels last seen in the late 1990s, as the country faces into a snap election. US equity and bond markets are closed today for a public holiday, so it might be tomorrow before we can better gauge the response to events over the weekend.
Fed Vice-Chair Ferguson says the 75bps reduction in the policy rate over the final months of last year has brought it “into a range consistent with the neutral rate – a rate that neither stimulates nor restricts economic activity”. Hence he believes “the current (monetary) policy stance leaves us well positioned to determine the extent and timing of additional adjustments to our policy rate” depending on how the risks to the Fed’s employment/ inflation mandate evolve.
Looking to the week ahead, obviously the focus for markets will be on the fall-out from the weekend’s developments. In this regard, EU leaders will get a chance to meet with Trump at the Davos economic summit taking place over the next few days. In terms of economic data, flash PMIs for January are due in the main economies on Friday, while US PCE inflation – the Fed’s target measure – for November is scheduled for Thursday. There are a number of important releases due in the UK, including the latest labour market report (for the September-November period) tomorrow, CPI inflation (December) on Wednesday, and retail sales (also December) on Friday. Today’s sees the release of a final CPI inflation reading for December in the Euro area.