Global Trends
- The US’ ‘reciprocal’ tariff announcement is almost here. ‘Liberation Day’, as President Trump is calling it, takes place tomorrow with the US set to unveil the measures at ~7am AEDT. There is still a lot of uncertainty about the size and scope of the latest round of tariffs, particularly with regards to how non-tariff barriers will be tackled. Various media reports over the past few weeks have mentioned a variety of plans. The latest is that the US is considering imposing tariffs of ~20% on goods from nearly every nation, rather than targeting specific countries or products. As was the case in previous rounds we would expect other nations to retaliate. This is something Canada’s Prime Minister Carney and the EU Commission President warned overnight.
- With the tariff announcements just around the corner markets have remained jittery with more bursts of intra-day volatility coming through. US equities unwound early losses to end the day in slightly positive territory (+0.4%), while stock markets in Europe outperformed (EuroStoxx600 +1.1%). In FX, the USD Index tread water with a bit of strength against the EUR (now ~$1.0790) offset by a firmer JPY (USD/JPY dipped to ~149.60). GBP (now ~$1.2924) and USD/SGD (now ~1.3439) held steady, while the NZD (now ~$0.57) and AUD (now ~$0.6274) recouped some of Monday’s weakness.
- By contrast, bond yields extended their slide. The US 10yr yield declined another ~4bps to be down at ~4.17%, near the bottom of its multi-month range. Bond markets continue to laser in on the negative growth implications and self-inflicted economic wounds tariffs can create. This was on show again in the latest US ISM manufacturing survey. The ISM slipped back into ‘contractionary’ territory with new orders and employment intentions dropping. At the same time, prices paid (a signal about future inflation) jumped up to levels last since in mid-2022. The JOLTS report also indicated that US labour demand is moderating and conditions are cooling.
- Tomorrow’s US tariff unveiling is a key near-term event risk. While more turbulence on the back of hefty and broad-based ‘headline’ tariff rates might generate some knee-jerk USD strength, the underlying detail and response of other nations will also be important factors that dictate the market’s reaction. Looking beyond the potential short-term volatility, we remain of the view that tariffs should only generate a temporary bump in US inflation, yet the drag on activity may be more long-lasting as businesses and consumers will be faced with higher prices and greater uncertainty. We believe this should see the USD trend lower over the medium-term as growth differentials between the US and other nations narrow, and as a weakening US jobs market brings interest rate cuts by the US Fed back on the agenda.
Trans-Tasman Zone
- AUD (now ~$0.6274) and NZD (now ~$0.57) partially unwound Monday’s softer start to the week over the past 24hrs. Given their positive correlation to risk sentiment the uptick in global equities ahead of tomorrow’s US tariff announcement (Thurs 7am AEDT) has provided a helping hand. The AUD also clawed back lost ground on the crosses with gains of ~0.3-0.7% recorded against the EUR, JPY, GBP, and CNH. That said, AUD/EUR (now ~0.5817) and AUD/GBP (~0.4860) remain near the bottom end of their respective cyclical ranges. AUD/JPY (now ~93.95) is still in the lower half of its 2025 range, while AUD/CNH (now ~4.5710) is close to its year-to-date average.
- Yesterday’s RBA decision also looks to have generated a bit of AUD support. As expected the RBA kept the cash rate steady at 4.1%, however it didn’t provide strong signals about the timing of another rate cut. Uncertainty clouds the landscape; hence the RBA is awaiting clarity as it navigates the tricky terrain. In our view, the US’ protectionist policy push suggests US growth risks are shifting to the downside. Outside of the US however authorities such as in China are pulling levers to guard against growth headwinds, while in Europe governments are moving to lift fiscal/defence spending. These are important offsets for Australia given trade with these nations is more economically important than with the US. Another interest rate cut by the RBA on 20 May, which will give the Board time to digest US tariff decisions, the quarterly Australian CPI (released 30 April), and the state of the local jobs market (due 15 May) is possible, although it isn’t guaranteed. For more see Market Musings: RBA: Navigating the uncertainty.
Read the full article by Peter Dragicevich Corpay
