Focus on Trump’s ‘reciprocal’ tariffs
It was quiet in markets on Friday with the US on public holiday. The euro was largely unchanged against the dollar on the day, though it advanced for a second week running, gaining around three quarters of a cent, and kicks off this week trading at around $1.1760. Sterling recovered ground against both the dollar and the euro over the latter part of the week, having fallen quite sharply on Wednesday, and is trading at around $1.3620 and £0.8630 respectively this morning. There’s a light economic data calendar this week, but in any case the focus will be on Trump’s ‘reciprocal’ tariffs as the current 90-day pause ends on Wednesday. Whatever he announces on (or before) Wednesday regarding the tariffs to be imposed on US trading partners will almost certainly not be the end of the matter though, and negotiations are likely to continue beyond Wednesday.
US bond yields rose on the week, by almost 15bps in the case of 2-year yields, with most of the increase occurring on Thursday after stronger than expected jobs data, which prompted a paring back of expectations for Fed rate cuts over the balance of this year. UK bonds recovered from a sharp sell-off midweek, with yields falling back on Thursday-Friday though they still ended 4-5bps higher on the week, while German yields were flat to marginally lower. In equity markets, European stocks were on the back foot on Friday, shedding around 1%, while US equities closed out a holiday-shortened week on Thursday at record highs.
ECB Governing Council member Villeroy says the appreciation of the euro, which he notes has been “significant”, has a clear “disinflationary effect” and hence increases the risk of inflation undershooting its 2% target, which the central bank “has to take into account” in its assessment of monetary policy.
Looking to the week ahead, as mentioned, it is quiet in terms of economic data, with Euro area retail sales today and the RICS housing survey and GDP (May) in the UK on Thursday and Friday respectively the main releases of note, while the Fed publishes the minutes of last month’s monetary policy meeting on Wednesday. Most attention, then, will be very much on Trump’s decisions regarding reciprocal tariffs.