Markets
he tariff story was a blitzkrieg at the start of this week, but it’s back to the trenches now as Mexico and Canada are given a month to come up with border control measures to slow migrants and drugs getting in the US while China retaliated on the opening 10% tariff hit. EMU stock markets gained around 1% with key US indices winning up to 1.35% for Nasdaq. EUR/USD managed to claw back to Friday’s levels just below 1.04. US yields lost 3.5 bps (2-yr) to 4.7 bps with the belly of the curve outperforming the wings even as Fed vice-chair Jefferson and SF Fed Daly joined the chorus of “caution” when it comes to adjusting policy rates further. Today’s US eco calendar contains ADP employment change and the services ISM. With US money markets currently positioned for a longer pause (next rate cut only fully discounted in July), we expect US data to lose some market moving potential short term with Trump-related volatility name of the game for now.
The ECB at the end of last year presented its new “wage trackers”. ECB Lagarde at several press conferences already referred to them with the message that they point to slowing wage growth and are more useful that the outdated/backward looking quarterly negotiated wage figures. Q4 2024 figures will for example be only released on February 25 with the previous and “latest” Q3 number clocking in at an EMU high of 5.4% Y/Y. The headline ECB wage tracker measures negotiated wage growth with smoothed one-off payments in the euro area. The ECB will publish four subseries on Wednesday in the week following the monetary policy meeting, which is today. In December, the tracker pointed to strong negotiated wage growth of 4.7% in 2024, easing to 3.2% this year. In monthly terms, this indicator is expected to peak at 5.4% at the end of 2024, the highest value recorded since the series began in January 2013. Today’s wage trackers are one of three key inputs this week for the central bank. January EMU inflation numbers were the first one on Monday. Both headline (2.5% Y/Y) and core CPI (2.7% Y/Y) were slightly above consensus, but didn’t get the usual media coverage in light of the tariff escalation. Finally, on Friday ECB staff is expected to publish insights on the level of neutral rates (r*) in Europe. ECB Lagarde dodged questions on the matter at last week’s presser, referring to this paper instead. It could be key in determining the remaining policy room to lower rates beyond the March meeting (25 bps cut to 2.5% expected). We stick to the view that the market reflex to put eggs in the ECB’s basket when it comes to shielding the EMU economy from whatever potential hit (eg tariffs) is the wrong one in a context where inflation remains stubbornly above the 2% inflation target. EMU money markets are again positioned too dovish (1.75% EoY policy rate) in our view.
News & Views
The New Zealand unemployment rate continued to increase in the final quarter of 2024. Rising to 5.1% from 4.8% in the quarter before, it was the highest since 2020Q3 (5.2%) compared to a series low of 3.2% end 2021. The employment rate eased to 67.4% from 69% a year ago. The annual fall reflected 32k fewer employed people which was the biggest decline since 2009. New Zealand’s participation rate fell slightly to 71% and is now below the peak seen prior to the pandemic. Wages (including overtime) grew 0.6% q/q and 3.3% in the year to the December quarter, this too is down from the 3.8% in 2024Q3. The numbers are broadly in line to marginally below expectations. The kiwi dollar shrugged though. NZD/USD (around 0.566) is already trading at weak levels with the overall US-Sino trade war narrative casting a long shadow over the currency. Equally, NZ money markets price in already a substantial amount of additional monetary easing of 125 bps+ in 2025 from the 4.25% currently.
The Financial Times citing officials reported that the EU is planning to hit US big tech should president Donald Trump slap tariffs on the bloc using its so-called “anti-coercion instrument”. This tool, dubbed a “bazooka”, is said to be the toughest response available without breaching international law and was created during Trump’s first term. It can be deployed when the EU determines a country is using tariffs to force changes in policy. A wide range of retaliatory measures include “revoking the protection of intellectual property rights or their commercial exploitation, for example software downloads and streaming service”, or “block foreign direct investment or restrict market access for banking, insurance and other financial services firms”. While the EU has a large trade surplus with the US in the goods sector (>€150bn in 2023), it’s running a >€100bn trade deficit in services.