Euro on the front foot
US equity markets fell sharply and the dollar weakened considerably yesterday, indicating investors believe Trump’s trade policy will have a large negative impact on the US economy. The Fed is now seen cutting interest rates quite aggressively over the coming months with about 100bps of easing priced in by the end of this year. The euro has been a notable beneficiary from the dollar’s (and US) woes, strengthening to $1.1050 against the US currency but also gaining around a penny against sterling to just shy of its 2025 to date high of £0.8475, while the pound has come back from yesterday’s best levels of over $1.32 against the dollar to trade at about $1.3050 this morning. The US employment (payrolls) report for March is due this afternoon and may elicit an asymmetric response in markets. A stronger than expected report might be seen as just the calm before the economic storm and so do little to support the dollar for example, while a softer than expected report will raise concerns that the US economy was already weakening before Trump’s “reciprocal” tariffs and so send the dollar further south.
In bond markets, US 2-year yields have fallen by the best part of 20bps on the back of the shift in Fed rate cut expectations, while 10-year yields are down more than 15bps to just under 4%, the first time they’ve been below 4% since early October, shortly after the Fed commenced easing by cutting rates by 50bps. Expectations for ECB and (more notably) Bank of England rate cuts have also firmed, with both seen lowering rates by around 75bps by year-end, in turn prompting a sizeable decline in bond yields and swap rates (3-year euro swaps are not far off their cycle lows of 2% back in December).
Equity markets had a really torrid time of it yesterday and the sell-off has continued overnight in Asia, with Japan’s Nikkei off another 3%. The main US indices finished the day down 4% to 6%, with the Nasdaq seeing the largest decline, while European stocks shed around 3%. The latter are down a further 1% at the start of business today, with the US set to open lower later today too according to the futures market.
As well as today’s employment report in the US – which according to the consensus forecast is expected to show job gains of the order of 140k in March (after 151k in February) – Fed Chair Powell is due to speak on the outlook for the economy, which will be of considerable interest for very obvious reasons.