Trump Tariffs Prompt Global Retaliation

In focus today

In the euro area, focus will be on the preliminary discussions of the proposed fiscal easing package in the German parliament. The Green party has so far refused the coming government’s proposal, but we see this as a negotiating tactic to get concessions ahead of the final vote on the bill Tuesday next week. Also in the euro area, industrial production data for January is due. Production has continued a declining trend the past two years, but with the recent improvement in soft indicators it will be interesting to see if hard data also shows a smaller decline in production than previously.

In the US, February PPI and weekly jobless claims are due for release. Following yesterday’s CPI, it will be interesting to see if PPI-figures comes in lower than expected as well. Markets expect an increase of 0.3% m/m, down from 0.4% in January.

In Sweden, we will receive the details for the Swedish inflation for February. The flash estimate last week was surprisingly high. The Riksbank’s target measurement CPIF came in at 2.9% y/y (cons: 2.7%, prior 2.2%), and core inflation, CPIF ex energy 3.0% y/y (cons: 2.7%, prior 2.2%). Headline CPI 1.3% y/y (cons: 1.1%, prior: 0.9%).

Economic and market news

What happened yesterday

In the US, February inflation figures dropped more than expected to 2.8% (prior: 3.0%, cons: 2.9%), indicating that January’s increase was likely a one-off. Core inflation fell to 3.1% (prior: 3.3%, cons: 3.2%). Although US inflation remains elevated, today’s figures offer reassurance for both the Fed and consumers. We anticipate a gradual easing of monetary policy in the US, with the next interest rate reduction expected in June.

In the EU, in response to the US metal and steel tariffs that commenced yesterday, the EU commission announced a range of countermeasures against the US. The Commission’s response intends to match the economic impact of the US tariffs on a 1:1 basis and can be lifted “at any time” if a resolution with the US is achieved, which remains the EU’s goal. Both the US tariffs on steel and metals and the EU’s counter tariffs are expected to have limited effect on growth in and inflation as they cover around 5% of total EU exports to the US.

In the euro area, the much-awaited speech by President Lagarde’s speech at the ECB Watchers conference did not provide any signals on what to expect at the April meeting. The geopolitical uncertainty and changing fiscal outlook pose fundamental questions for monetary policy, and the ECB is clearly attentive to remaining flexible and agile in its policy response. Lagarde touched upon the risk of inflation volatility turning into persistently elevated inflation as wages adjust, which requires the ECB to not pre-commit to any rate path and remain agile in its communication. Overall, the speech underlined the uncertainty also visible in the vague guidance at last week’s meeting. The upcoming data (inflation, PMIs), tariff announcement and fiscal negotiations in Germany will likely be decisive for the outcome. Markets are discounting a 45% probability of a cut in April.

In Canada, the BoC delivered a 25bp cut, as widely expected, setting policy rate at 2.75%. The market reaction was relatively subdued, with significant attention on the uncertainty and trade tensions stemming from US tariffs. The BoC highlighted that monetary policy cannot counteract the effects of a trade war, but it can be utilized to prevent higher prices from leading to persistent inflation. In response to yesterday’s tariffs, Canada swiftly retaliated by imposing tariffs on nearly USD 21bn of US goods, labelling the US levies as “completely unjustified, unfair and unreasonable”.

Equities: It was perhaps not a bounce, but at least a pause in the US selloff. Gains were driven by last weeks’ worst performers. Thus, big difference between indices with S&P500 rising 0.5% but Nasdaq 1.2%. Europe also higher with Stoxx 600 0.8%. Big rotation underneath, with investors rotating out of defensives again (consumer staples -2.5%) and into the MAG7 names. However, risk appetite is worsening this morning again with futures lower.

FI&FX: Yesterday, we finally saw a modest widening of the US-Bund yield spread as European yields declined while US yields rose and the 10Y US-Bund yield spread rose some 5bp from 138bp to 143bp. It has been the same pattern in the 2Y US-Bund yield spread. EUR/USD remained around the 1.09 mark. As widely expected, BoC delivered a 25bp rate cut bringing its policy rate to 2.75%, resulting in a limited market reaction. EUR/NOK traded lower during Wednesday, currently around the 11.57 level, as market’s price the probability for March cut close to 50/50. EUR/SEK rose from the 10.93 level to above 11.01 but are now back just below the 11.00 mark.