Euro on the front foot
The euro is on the front foot this morning after Germany’s new chancellor-elect announced plans for a EUR 500bn infrastructure fund (to be used over the next 10-years) and a relaxation of the country’s “debt brake” to allow for increased defence spending. The single currency has strengthened to almost $1.07 against the dollar, its best level since mid-November last, and has risen to about £0.8320 against sterling. The pound has also extended its gains against the US currency, trading close to $1.2850. Meanwhile, the US Commerce Secretary has suggested there may be some rowing back on tariffs on Canada and Mexico – though he didn’t indicate what that might entail – with an announcement possible today, which obviously could impact markets.
US bonds saw fairly wild swings yesterday. Yields fell sharply initially as stocks sold off in response to Trump’s tariffs, but then reversed course sharply with 5- and 10-year yields jumping by around 15bps from their lows to end 5bps and 10bps higher on the day. German and UK yields were more sedate, though they too ended off their lows, while they have spiked higher this morning following the rise in US yields and the news out of Germany.
In equity markets, European stocks had a torrid time of it yesterday, shedding almost 3%, though they are recovering ground at the open this morning. The S&P 500 closed down more than 1% after a rally from its lows of the day fizzled out late in the session. It is down around 6% from its record high of just a couple of weeks ago and has now essentially erased the gains it had made following Trump’s election victory in early November.
Fed member Williams says he is factoring in “some effects of tariffs on inflation”, which he expects to see “later this year,” while acknowledging that they will also “affect economic
activity – decisions by businesses to invest, consumers to spend – which is another big uncertainty.” He believes the current monetary policy stance is “mildly restrictive” and doesn’t see the need to cut interest rates at this stage.
There’s a heavy enough schedule of economic data today with the ISM services index, factory orders, and the ADP employment report in the US; producer prices (PPI) in the Euro area; and final PMI services readings in the main economies. Also, members of the Bank of England’s MPC appear before the Treasury Select Committee to discuss the recent Monetary Policy Report.