Bunds and ECB Easing/Trump Tariffs

February 20, 2025 8:03 AM UTC

          It is highly likely in April that the U.S. will announce a 25% tariff on EU cars and pharmaceuticals (here) and also reciprocal tariffs against the EU. The majority could be implemented given Trump’s desire to raise revenue/dislike of the EU as well as negotiate trade deals. This

Bank Indonesia Policy Review: Rate Pause As BI Steadies IDR

February 20, 2025 1:25 AM UTC

In line with our view Bank Indonesia kept its policy rate steady at 5.75% in its February 18-19 meeting after last month’s surprise cut. The weakening rupiah and external uncertainties reman critical factors influencing the rate decision. The central bank is likely to assess the impact of its Janu

Mexico: Tariffs and Growth Issues Could Impose Fiscal Difficulties

February 19, 2025 10:20 PM UTC

Mexico aims for fiscal consolidation in 2025, relying on revenue growth while freezing most expenditures. However, weak growth could undermine this strategy. Authorities expect 2–3% GDP growth, but our forecast is 1.6%, with a recession risk. A less integrated U.S.-Mexico trade relationship, parti

U.S. 25% Tariff for Cars, Pharma and Semiconductors?

February 19, 2025 1:40 PM UTC

·        Tariff reality in the spring and summer will likely be both tariff threats to negotiate trade deals and permanently higher tariffs in certain products and reciprocally to raise revenue for the U.S. government – along Peter Navarro guidance to Trump.  The macro effects of this cou

Europe: Economic Consequences of Likely Defence Build-Up

February 18, 2025 3:29 PM UTC

As Europe is forced to consider a massive and rapid ramp up to its relatively mediocre defence spending (Figure 1) as it contemplates a reduction in military support from the US, key questions emerge as the economic effect(s).  Will it boost or inhibit growth, add to inflation, and how will/should

U.S. Treasuries and the Trump Effect

February 18, 2025 1:20 PM UTC

If the Fed convince the market that it is leaving the door open to easing and sees Fed Funds reduction multi-year, then 2yr could hold onto a small discount in the next two quarters and then swing to a small premium of 2yr to Fed Funds (Figure 1).  10yr yields will likely maintain a small to modest

RBA Review: It has begun

February 18, 2025 4:47 AM UTC

The RBA meeting on February 18th cut rates on by 25bps to 4.1% and suggest data dependency going forward

Reciprocal Tariffs and Reducing Bilateral Trade Imbalances

February 17, 2025 10:28 AM UTC

·       President Trump’s executive order on reciprocal tariffs has not produced much market reaction, both as the proposals will not be delivered to the president until April 1 and the process of Commerce/U.S. Treasury and Homeland Security input is seen reducing the odds of penal tariffs.

RBA Preview: Signaling Earlier Cut

February 17, 2025 2:53 AM UTC

The RBA meeting on February 18th will keep rates on hold at 4.35% and signal a cut in April

Preview: Due February 28 - U.S. January Personal Income and Spending - Core PCE Prices to underperform Core CPI

February 14, 2025 4:33 PM UTC

We expect a 0.3% rise in January’s core PCE price index, slower than the 0.4% seen from core CPI, while we expect a modest 0.3% rise in personal income to outpace an unusual 0.1% decline in personal spending.

U.S. January Retail Sales - Slippage likely to be weather-induced

February 14, 2025 1:57 PM UTC

January retail sales at -0.9% saw a significant downside surprise, though we believe the main reason for weakness was bad weather, with a correction from strength in Q4 also likely to be a factor. The core rates were also weak, ex auto at -0.4%, ex auto and gas at -0.5%, and the control group that c

China: Private Sector Balance Sheet Recession?

February 14, 2025 10:45 AM UTC

  Overall, we maintain the view that parts of China’s household sector are showing signs of a balance sheet debt consolidation, due to the excess buildup of debt in the past 20 years relative to disposable income.  The non-financial corporate sector is more difficult to interpret, due to strengt

Europe’s Ukraine Political Fallout and Market Hopes

February 13, 2025 12:33 PM UTC

European politicians are surprised and angry at the U.S. stance on a peace deal for Ukraine and less military support for Europe, but eventually they will have to accept the new reality.  Europe is too divided to provide security guarantees to Ukraine on its own. A further increase and acceleration

Bank Indonesia Policy Preview: Rate Pause Likely as Rupiah Stability Takes Priority

February 13, 2025 4:55 AM UTC

Bank Indonesia is expected to keep rates steady at 5.75% in its February 18-19 meeting after last month’s surprise cut. While inflation remains low and growth is steady, the weakening rupiah and external uncertainties may delay further easing. The central bank is likely to assess the impact of its

India CPI Review:Rate Cuts in Sight as Prices Cool

February 13, 2025 4:12 AM UTC

India’s inflation cooled to 4.31% in January, clearing the way for more rate cuts as food prices dipped. The RBI is shifting focus to growth. But risks remain—rupee weakness and global commodity prices could still stir inflationary trouble.

U.S. January CPI - A clear disappointment

February 12, 2025 2:05 PM UTC

January CPI is a clear disappointment rising by 0.5% overall and 0.4% ex food and energy (0.446% before rounding). While there is a problem of residual seasonality bringing strength in Q1 data, that yr/yr rates accelerated, overall to 3.0% from 2.9%, and ex food and energy to 3.3% from 3.2%, will be

Japan With/Against Trump?

February 12, 2025 6:11 AM UTC

As Donald Trump pressure other countries with his tariff tactics, every country, even U.S. allies, are trying to figure out whether they should retaliate or comply. Japan, as a long term U.S. ally, is of no exception but they seem to have taken a different path than Canada when dealing with Trump. I

Trump’s Tariffs: Steel Then Reciprocal and Then Cars

February 11, 2025 1:23 PM UTC

 The 25% Steel and Aluminum tariff could have small to modest adverse inflation and GDP growth impacts on the U.S., but the prospect of reciprocal and more product and country tariffs create trade policy uncertainty/supply chain disruption and paperwork problems.  This could amplify the impact of

Europe’s Gas Problem Again?

February 11, 2025 8:30 AM UTC

The ECB staff forecasts on March 6 will be revised upwards for 2025 and 2026, due to the surge in wholesale gas prices.  However, the ECB will likely take the view that 2 round effects from higher gas prices on balance are unlikely to boost core inflation (especially given wage tracker softness) an

Markets and Trump’s Early Days

February 10, 2025 7:55 AM UTC

  The early days of the new Trump administration has seen lots of volatility around the on-off tariffs with Canada and Mexico, but the more stable U.S. Treasury market has helped provide an anchor.  U.S. Treasuries have shift towards the view that the 10yr budget bill will be delayed until H2 and

Monetary Policy Reset: RBI’s Balancing Act Begins

February 7, 2025 4:57 PM UTC

The RBI has cut the repo rate by 25 basis points to 6.25%, marking its first reduction in five years. While aimed at supporting growth, the central bank maintains a neutral stance, signaling caution amid global uncertainties. Inflation is projected to ease, but risks from trade disruptions and finan

U.S. January Employment - Trend still strong despite a weather-restrained January

February 7, 2025 2:09 PM UTC

January’s non-farm payroll with a 143k increase is on the low side of expectations, though we suspect January data was restrained by bad weather. A dip in the workweek is also probably weather-induced and may be behind an above trend 0.5% rise in earnings per hour. Unemployment slipped to 4.0% fro

Eurozone: The Neutral Rate – Probably Little Changed Recently Unlike Central Banks

February 7, 2025 1:14 PM UTC

A well-advertised research paper from the ECB suggests that the real neutral rate of interest for the EZ has not changed very much in the last few years but with a likely range of between -0.5% and +0.5%, but still well below estimates for what is so-called r* prior to the pandemic (Figure 1).  The

Fixing The U.S. Trade Deficit

February 6, 2025 2:30 PM UTC

  New U.S. trade deals will likely make slow progress in reducing bilateral trade deficits as the underlying drivers behind the U.S. trade deficit are macro forces.  While the U.S. economy outperforms other major trading partners; the value of the USD remains overvalued and as long as tariffs are

RBI Monetary Policy Preview: MPC to Deliver a Rate Cut

February 6, 2025 7:50 AM UTC

With the RBI’s policy review around the corner, all eyes are on how the central bank will tackle India’s slowing growth momentum and the increased currency volatility. The RBI is likely to cut rate by 25bps to 6.25% on February 8. Imported inflation will remain a key concern. 

U.S. January ISM Services - Dip may be weather-related

February 5, 2025 3:15 PM UTC

January’s ISM services index at 52.8 from 54.0 is weaker than market expectations though consistent with the S and P services PMI released earlier. It is possible bad weather, with very cold weather in much of the country probably more significant than the localized Los Angeles fires, restrained t

Congress Struggles Over Budget Bill

February 5, 2025 2:48 PM UTC

The House is struggling to reach consensus on the beautiful huge 10yr budget bill, as GOP budget hawks want to see multi trillion expenditure cuts, though eventually the 10yr expenditure cuts will likely compromise around USD 0.5-1.0trn.  Tax cuts are also unlikely to match President Trump campaign

Eurozone: Trump Taking Aim at the EU?

February 5, 2025 9:06 AM UTC

President Trump has made it clear that the EU is going to face US tariffs in the not too distant future.  Admittedly, tariff threats have been used as the basis for negotiation elsewhere, this may be the case for the EU too – as was the case during Trump’s first term.  As for the EU, it does h

BCB Minutes: Detailing the Deterioration

February 4, 2025 6:29 PM UTC

The BCB raised rates by 100bps to 13.25%, signaling another hike in March. External uncertainty remains, but domestic risks worsened, with inflation expectations rising. The BCB stressed fiscal-monetary coordination and warned about policy distortions. Despite markets pricing a 15% rate, we expect s

China/U.S. Trade War and next To Talks?

February 4, 2025 10:02 AM UTC

China’s targeted and measured counter tariffs against the U.S. are designed to push the U.S. towards the negotiating table on the wider issue of the U.S./China trade deficit.  Negotiating will likely start into the spring, but negotiating will be tough as the U.S. wants a phase 2 deal with new ob

Can Tech and Productivity Cushion China’s Long-Term Growth Slowdown?

February 3, 2025 3:45 PM UTC

 While innovation from China’s technology initiatives can provide help to cross over productivity, the benefit will likely only be modest due to the downgrading of the private sector in China and the lack of openness to inward trade.  The structural slowdown in capital productivity will dominate

EZ HICP Review: Headline Rises Amid Still Friendly Core Messages?

February 3, 2025 10:38 AM UTC

There were mixed messages in the higher-than-expected January flash HICP numbers.  For a third successive month, the headline but this time by ‘only’ 0.1ppt, to a six-month high of 2.5%, but where the core (again) stayed at 2.7%, partly due to what is seemingly relatively stable services inflat

U.S. December Personal Income, Spending and Core PCE Prices confirm Q4 totals, Q4 Employment Cost Index as expected

January 31, 2025 1:56 PM UTC

December’s personal income and spending data is largely old news with Q4 totals having been seen in the GDP report. Gains of 0.2% in core PCE prices and 0.4% in personal income are in line with expectations, but spending with a 0.7% increase with positive back month revisions reflects the strong c

BCB Review: Maintaining the Course

January 30, 2025 6:09 PM UTC

The Brazilian Central Bank (BCB) raised the policy rate by 100bps to 13.25%, signaling another hike in March while monitoring economic data. The statement had a neutral-to-dovish tone, with inflation risks stemming from services CPI, unanchored expectations, and fiscal policy. Market projections see

Preview: Due January 31 - U.S. December Personal Income and Spending - Core PCE Prices to match Core CPI

January 30, 2025 2:44 PM UTC

December’s personal income and spending report will be largely old news, with Q4 totals seen with the GDP report on January 30. Our pre-GDP forecasts for a 0.2% rise in core PCE prices and a 0.4% rise in personal income still look valid, though the GDP data is consistent with a 1.3% rise in person

ECB Review: Policy Still Restrictive

January 30, 2025 2:34 PM UTC

It was always likely that the ECB verdict at this month’s Council meeting would be less resounding than that seen in December.  A fifth 25 bp discount rate cut did occur, to 2.75%, but may not have seen any demand to at least consider a larger move as was the case last month.  But the door is le

Eurozone Flash GDP Review: Momentum Missing as Divergence Continues?

January 30, 2025 10:31 AM UTC

After a series of upside surprises, EZ GDP both weakened and undershot both consensus and ECB expectations in Q4 (Figure 1). There is a certain irony that for an ECB Council that has evidently shifted its main concern away from broadly falling inflation to real economy weakness, the soft Q4 GDP outc

EZ Monetary Insight: Politics Making Banks More Risk Averse Accentuating EZ Divergences

January 29, 2025 11:01 AM UTC

Ahead of what seems to be a routine decision tomorrow, recent monetary data complicate the policy outlook for the ECB in the months ahead.  Positively, ECB compiled money data show discernible signs of as revival in bank lending, even for companies, although still hardly any growth in real terms. 

U.S. December Durable Goods Orders - Aircraft slip on seasonal adjustments, ex transport trend marginally positive

January 28, 2025 1:48 PM UTC

December durable goods orders are weaker than expected on the headline with a 2.2% decline though ex transport with a 0.3% rise is in line with consensus, if not particularly impressive coming after a 0.2% November decline.

Bank Indonesia’s Policy Shift: Is More Easing on the Horizon?

January 28, 2025 9:01 AM UTC

Bank Indonesia’s surprise rate cut marks a departure from its traditionally cautious approach and underscores the central bank’s growing focus on stimulating growth. While the decision provides a much-needed boost to economic activity, it also raises questions about the future trajectory of mone

Monetary Policy Watch: Will RBI Infuse Liquidity or Cut Rates?

January 27, 2025 7:27 AM UTC

With the RBI’s policy review around the corner, all eyes are on how the central bank will tackle India’s growing liquidity crunch. Despite calls for rate cuts, the banking system's liquidity shortfall—hitting INR 3.3 trillion—poses a bigger challenge, keeping lending rates high and slowing c

ECB Preview (Jan 30): A Staging Post in Easing Cycle

January 24, 2025 10:32 AM UTC

It is unlikely that the ECB verdict at this month’s Council meeting will be anything like as resounding as that seen in December.  A fifth 25 bp discount rate cut is virtually assured, to 2.75%, but may not see any demand to at least consider a larger move as was the case last month.  Admittedly

BoJ Review: Hawkish?

January 24, 2025 5:33 AM UTC

The BoJ hiked by 25bps to 0.5% in the January meeting

Trump and Markets

January 23, 2025 2:16 PM UTC

Global markets will be driven by policies and current valuation in 2025, especially new Trump administration policies.  Trump could jawbone markets for a lower value of the USD and lower oil prices, which could have a temporary modest impact (joint US/Japan FX intervention is possible) but the stru

China/U.S. - Trade War or Trade Deal?

January 22, 2025 2:11 PM UTC

·       We see the April 1 review of the phase 1 U.S./China trade deal being adverse and President Trump’s carrot and stick approach leading to a 10% rise in tariffs on China imports by the summer.  We eventually see a phase 2 U.S./China trade deal being reached in Q4. The main alternative

President Trump: Filling in the Blanks

January 21, 2025 9:12 AM UTC

While the new executive orders from president Trump were focused on immigration and energy issues, the threat of 25% tariffs against Mexico and Canada by Feb 1 raises the stakes in North America negotiations in the coming weeks.  China tariff threats will likely become more concreate in Q1, though

Rupee at Record Low: Can India Weather the Dollar Storm?

January 21, 2025 5:03 AM UTC

The Indian rupee has slumped to an all-time low of 86 against the US dollar, underscoring the pressure on emerging market currencies as the dollar index surges to multi-month highs. For India, this currency depreciation signals potential disruptions in financial markets, with equities and bonds—no

Brazil Risk Premia and EM Debt

January 20, 2025 8:15 AM UTC

Brazil debt market has two domestic crises rather than a spillover from the U.S. in the form of inflation and fiscal policy. Very restrictive BCB policy can help produce some disinflation and we forecast 4.1% for 2026, which some allow some rate cuts in H2. Brazil risk premium will likely be reduced

BoJ Preview: 50% Hike, 100% Disappointment

January 20, 2025 2:00 AM UTC

Market is currently pricing more than 50% the BoJ will hike in the January 23-24 meeting but it is unlikely to be the hawkish BoJ market participants want.