Highly Anxious Financial Market Mood as Trump Gives Tariff Go-Ahead – Currency Thoughts
Highly Anxious Financial Market Mood as Trump Gives Tariff Go-Ahead
February 3, 2025
(206) The dollar has soared and equity markets have plunged in response to the weekend White House announcement of 25% U.S. tariffs against Canada and Mexico and 10% levy against imports from China to go into effect on Tuesday. A tit-for-tat trade war is feared that may spawn higher inflation and interest rates everywhere. Tariffs have a bad history in the United States going back to the early 18oos as as source of friction between the young federal government and the southern states even before the Abolitionist Movement took root and later as a prime cause of the Panic of 1893 and Great Depression during the 1930s.
In the immediate run, tariffs will enhance U.S. price competitiveness, so the dollar has been very strongly bid today, rising 1.4% against the Mexican peso, 1.3% versus the kiwi, 1.1% relative to the euro, 1.0% vis-a-vis the Australian dollar, 0.8% against the Canadian dollar, 0.6% versus the Swissy, and 0.4% against the Turkish lira and sterling. The one major currency to have bucked the selloff has been the Japanese yen, which rose 0.4% against the greenback (see comment below on BOJ Board meeting summary).
Equity market selling has correlated with lower long-term interest rates, amounting among 10-year sovereign bond assets to 18 basis points in Canada, 8 bps in Germany, 9 bps in France, 7 bps in Spain, 6 bps in the U.K. and Italy, and four basis points in the United States.
Many equity indices in the Pacific Rim closed down 3.5% in Taiwan, 2.3% in South Korea, 2.7% in Japan, 1.8% in Australia, 1.4% in New Zealand and 1.1% in Indonesia, but the Chinese and Hong Kong markets closed with little net change. The DOW and SPX and major bourses in the euro area currently show losses between 1% and 2%, while the Nasdaq has already dropped 2.0%.
Bitcoin, down 1.4%, has not been a refuge, extending a pattern of responding to several surges of uncertainty but with the conspicuous exception of jumps in inflationary expectations.
Prices for gold and oil are 0.7% and 1.5% firmer.
This Monday’s data menu has been dominated by manufacturing purchasing manager surveys and the preliminary estimate of consumer price inflation in Euroland.
The Institute of Supply Management’s monthly U.S. manufacturing PMI survey improved more than forecast, with an overall 28-month high of 50.9 in January versus 49.2 in December. Sub-indices for orders jumped 3.1 points to a 32-month high, while those for employment and and inflation climbed to 8-month highs and were also above the 50 breakeven level. The U.S. PMI survey conducted by S&P Global has been revised up 1.1 points from the preliminary report to a 7-month high of 51.2.
Euroland’s PMI among manufacturers rose 1.5 points to an 8-month high of 46.6 in spite of the tariff threat. A PMI of 46.6 still conveys a significant recession but, unlike the reports in November and December, the downturn did not continue to intensify. Readings for the the big-three economies using the euro (Germany and France at 44.0 and Italy at 46.3) comprised three of the four weakest manufacturing sectors in the bloc. Spain’s reading of 50.9 was at a 5-month low and well below 54.5 reached in October.
The British manufacturing PMI bounced above December’s 11-month low to a 3-month high of 47.0, still 3 index points below the line dividing improving conditions from deteriorating ones.
Among other European economies, the Russian manufacturing PMI reading of 53.1 was at a 6-month high, but the Swiss score of 47.5 was at a 6-month low. Norway and Sweden had 3- and 2-month highs of 51.2 and 52.9. Poland’s 48.8 in January represented a 2-month high, and the Czech reading of 46.6 was a 3-month high. But in Hungary, the PMI fell to a 3-month low of 49.8.
Australia‘s purchasing managers index among surveyed manufacturers was revised up to a 23-month high that, at 50.2, barely cleared the neutral level of 50. Turkey‘s PMI reading of 48.0 was at a 3-month low.
The Chinese and Indian PMI readings last month were a 4-month low of 50.1 and a 6-month high of 57.7. Japan’s PMI moved deeper into contractionary territory, falling to a 10-month low of 48.7. Elsewhere in the Pacific Rim, PMI readings rose to an 8-month high in Indonesia of 51.9 and 2-month highs of 50.3 in South Korea and 48.7 in Malaysia, but fell to a 9-month low of 49.6 in Thailand, 5-month lows of 52.3 in the Philippines, a 4-month low of 48.9 in Vietnam, and 3-month low of 51.1 in Taiwan and 50.9 in Singapore.
The Absa-compiled South African PMI reading for South Africa last month was 45.3, a 5-month low. Canada‘s PMI score of 51.6, a 3-month low, reflected domestic political uncertainty and tariff worries. Brazil‘s PMI climbed above December’s 4-month low of 50.4 to a 2-month high of 50.7.
The early reading for January consumer price inflation in the euro area rose 0.1 percentage point as analysts were expecting to a 6-month high of 2.5%, versus the recent low of 1.7 back in September. Energy price inflation jumped from 0.1% in December to 1.8% this month. The 12-month 3.9% rate of price increase in services versus 4.0% in both December and January 2024. Core inflation that excludes energy and food printed at 2.7%, a tad above expectations.
Turkish CPI inflation dipped to a 19-month low but, at 42.1%, exceeded expectations. Producer price inflation in Turkey of 27.2% this month was its lowest in 47 months.
A summary of last month’s Bank of Japan Board meeting, which concluded with a doubling of the interest rate target to 0.50%, read hawkishly. With the Fed pausing rate cuts, future rate increases by the Bank of Japan are seen as less disturbing to financial markets. The time is fast approaching to end significantly negative real interest rates in Japan.
U.S. construction spending rose 0.5% on month and 4.3% on year in December.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland CPI, manufacturing purchasing manager surveys in January 2025, summary of BOJ Board meeting last month, Turkish CPI and PPI
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