The Day After

Overview: Little would one know from looking at the US economic outperformance and the record-high household net worth, but the US President said that global trade has “looted, pillaged, raped, and plundered” the US economy. Rather than some sophisticated analysis to measure trade and non-trade barriers as the President Trump suggested, the so-called "kind reciprocity," appears to be a simple function of US imports as a percentage of the overall bilateral trade deficit. The 10% minimum is effective April 5 and the reciprocity levy on April 9. Many are still holding out the possibility that concessions by other countries will bring some relief. Yet, look at Israel, which removed all tariffs on US goods earlier this week and was still slapped with a 17% reciprocal tariff. 

The dollar has been sold aggressively, equities has dropped sharply, and interest rates have fallen. All the G10 currencies are higher against the greenback. The least is the roughly 0.60% gain by the Australian dollar. The Swedish krona, Swiss franc and Japanese yen are the leaders, up around 1.9%-2.2%. Most emerging market currencies are stronger, and the Chinese yuan is a notable exception. The offshore yuan was under pressure even before the PBOC validated the weakness with a sharply high dollar fix. The Thai baht is also weaker. Thailand was hit was a 36% reciprocal tariff, a little more than China and India. Equity markets are a sea of red. In the Asia Pacific region, New Zealand was a rare exception with its market eking out a 0.15% gain. Europe's Stoxx 600 is off around 1.6%, and US index futures are off 2.5% to 3.5%. Japan and Antipodean 10-year yields dropped 10-15 bp, and European benchmark 10-year rates are 5-7 bp lower. The 10-year US 10-year US Treasury yield is off eight basis points to 4.05%. It has not traded below 4% since last October. Gold reached a record near $3168 before profit-taking kicked-in. May WTI gapped lower after reaching almost $72.30 yesterday. It has approached Monday's low near $68.80. 

USD:  The Dollar Index has been crushed. It gapped lower and has been sold to nearly 102.10, with the lows set in the European morning. It is off nearly 1.6% today. The 2023 low was near 99.60 and the 2024 low was a little above 100.00. The February goods trade balance was reported last week at almost $149 bln. It was wider than expected even if slightly narrower than the $155.6 bln recorded in January. The overall trade balance will be released today. The median forecast in Bloomberg's survey is for a $123.5 bln deficit after $131.4 bln in January. That would put the two-month shortfall at about $255 bln compared with ~$136 bln in the first two months of last year. Some of this reflects the effort by businesses and households to beat the tariffs. Some of the goods will sit in inventories, which later will be drawn down, but probably not before price increases. The distortion will underscore the importance of the final sales to private domestic purchasers as an underlying measure of growth, which excludes government, inventory, and trade when assessing Q1 25 growth. The market may be more sensitive to ISM services (small tick down is expected, while prices paid by increase slightly). Weekly initial jobless claims are also on tap. So far, the government layoffs and reports of private sector layoffs has not yet been picked up by the weekly jobless claims. Confidence is high that they are coming, even if the timing is a bit elusive. We suspect it will be seen later in this quarter. 

EURO:  The euro has run up today from almost $1.08 to $1.1050. Last year's high was around $1.1215 and the 2023 high was near $1.1275. The eurozone reported its final services and composite PMI and both were revised up. The services PMI stands at 51.0, up from the 50.4 preliminary reading to 51.0. It was 50.6 in February and is the first increase of the year. The composite PMI stands at 50.9, up from the flash estimate of 50.4 and 50.2 in January and February. The swap market has boosted the odds of a rate cut at the ECB meeting on April 17 from about 75% yesterday to 90% today. Separately, note that a Danish company, Maersk acquired a 76 km railroad that runs adjacent to the Panama Canal. It was acquired for an undisclosed amount from a US-based company (Lanco Group) and the Canadian-based Canada Pacific Kansas City railroad. 

CNY:  The US announced a 34% tariff on China, which is on top of the 20% increase on tariffs that Trump previously announced. The dollar jumped to CNH7.3485 before steadying. It is the highest since February 3, when it reached CNH7.2735. As we have suggested, there was a move underway before today. The dollar rose in ten of the past 12 sessions coming into today. The PBOC introduced slightly more volatility in setting the dollar's reference rate and today's fix was at CNY7.1889 (CNY7.1793), a 0.13% increase. Caixin reported its March services (51.9 vs. 51.4) and composite PMI (51.8 vs. 51.5). 

JPY: Japan was hit with a 24% reciprocal tariff. The dollar initially rose to almost JPY150.50 before returning to session lows near JPY149.20. The exchange rate continues to broadly track US yields. The drop in US rates has seen the greenback plunge to about JPY146.30, its lowest level since last October. There is little meaningful technical support ahead of the JPY140.00 area, though JPY145 is a round, psychological level. Tomorrow, Japan reports household spending figure for February. We expect it to lend credence to our larger argument that does not see consumption as a simple or "natural" reflection of income. It is part of a larger cultural force, which include average size of domiciles. Household spending is expected to have fallen by about 0.8% year-over-year, the same as the January gain. Early next week, February labor earnings are due. Around 3% year-over-year, cash earnings are near their fastest since 1997. 

GBP:  The UK will be subject to a 10% reciprocal tariff, half of levy on the EU. Sterling held up better and settled above $1.30 for only the third time since last November. and has been driven to almost $1.3185 today. Last September's high was near $1.3435 and that may be the next target. The final reading of March services and composite PMI were both revised lower. The services PMI is at 52.5, down from the preliminary estimate of 53.2, but up from 51.0 in February. The composite PMI was revised to 51.5 from 52.0 initially, and 50.5 in February. The UK economy was flat in Q3 24 and grew by 0.1% in Q4 24. The economy unexpectedly contracted in January (-0.1%). February GDP is due at the end of next week.

CAD:  Despite complaining about Canada's protection of its dairy industry and NAFTA (as if the USMCA treaty was not negotiated during Trump's first term), it escaped the reciprocal tariffs. The Canadian dollar strengthened. The greenback has been sold slightly through CAD1.4120, a new low for the year. A break of CAD1.4100 could signal a move toward CAD1.3950-CAD1.4000. Canada reports February merchandise trade and services and composite PMI. Recall that in January, Canada's goods trade surplus with the US reached a record of C$14.4 bln on a 7.5% jump in exports (driven by autos, parts, and energy) as businesses tried getting ahead of the US tariffs. Auto exports, of which over 90% are destined for the US, surged by 12.5%. Overall, exports rose 5.5% in January and imports rose 2.3%, and both reached record highs. When adjusted for the exchange rate, export volumes, were up 4.5% and imports rose 1.5%. With tariffs looming, the forces at work in February seem similar as seen in January. The PMI is arguably less significant because it does not reflect yet the extent of the coming shock from the US tariffs.

AUD:  Australia received the minimum 10% reciprocal tariff, after complaining about how Australia's ban on US beef. New Zealand was hit with a 20% reciprocal tariff. Yet, the New Zealand dollar is outperforming the Aussie today. The former is up almost 1%, while the latter is up about 0.65%. The Australian dollar was sold to a three-day low near $0.6230 before rebounding to almost $0.6345 by late morning turnover in Europe to take out yesterday's high. The $0.6400 area has capped the Aussie this year. Australia reported a narrowed than expected February trade surplus earlier today. It narrowed from A$2.97 bln in January to A$5.16 bln in January. The rolling 12-month moving average continues to fall from a peak in March 2023 near A$14 bln to stand now a little below A$5.0 bln. Exports fell by an average of 0.2% a month in 2024 and but recovered smartly in Q4 24, rising by an average of 2.8% a month. Goods exports dropped 3.6% in February (+0.8 in January). Goods imports rose by an average of 0.8% last year and surged 2.7% a month on average in Q4. In January, goods imports fell by 0.4% and jumped 1.6% in February. 

MXN: The dollar spent most of Wednesday within Tuesday's range (~MXN20.32-MXN20.54) before breaking down to a little through MXN20.19, a four-day low. Its losses were extended to almost MXN20.02 today. The four-month low seen in March was slightly below MXN19.85. In the best of times, Mexico's capex. Private consumption, and leading indicators, which are on tap for today, do not capture the attention or imagination of market participants, and this may be especially true today. Even before the US election, capital investment in Mexico was weak. In 2023, it rose by an average of 1.1% a month (1.0% average in 2022), but in the first half of 2024, it fell by an average of almost 0.2% a month and in H2 24 fell by nearly 0.5% a month. In Q4, the decline averaged slightly less than 1% a month. The weakness was part and parcel of the weak domestic economy, but the US insistence on re-shoring after 2-3 decades of encouraging near shoring into Mexico, is likely to exacerbate the cautious stance by businesses. 

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