Hypothetical Trade War Transformed Into an Actual One – Currency Thoughts
Hypothetical Trade War Transformed Into an Actual One
March 4, 2025
The only date in the calendar year whose name actually makes a statement is “March Forth”. Right on cue, a trade war pitting the United States against many other countries was launched by President Trump and met immediately by import duties against U.S. goods shipped to Canada, Mexico and China. Plans are also in the works for U.S. levies on imports from the European Union. As promised, 25% tariffs were imposed on imports from Mexico and Canada, and the one on Chinese imports was doubled to 20%. Canada’s response was selectively concentrated on agricultural items but will be broadened extensively if a negotiated truce rescinding today’s moves is not reached within three weeks.
Analysts and market participants are busily recalibrating their 2025 growth and inflation expectations. The Trump team understands that a trade war will entail some pain to the U.S. economy but believes that a) it will be temporary and eventually overshadowed by long-term benefits and b) even if the net impact is adverse, America still wins because economies more dependent and therefore exposed to international trade will feel considerably greater pain than the United States. Early estimates emerging today are that today’s measures just against Canada and Mexico will lop 0.2 percentage points or more off U.S. economic growth, and that doesn’t factor in the additional influence of retaliatory actions by those countries nor what seems an inevitable broadening of the trade war to many more countries.
In overnight financial market action,
- U.S. equities, which experienced yesterday their worst performance of this year, are down another 0.5% in pre-open futures trading. Japan’s Nikkei closed down 1.2% today. Indonesia’s stock market fell over 2.0%, and share prices in Germany, Italy and Spain have also lost over 2.0%.
- The weighted DXY dollar index fell 0.7% to a 3-month low. The greenback lost 0.9% against the yen and is at a 5-month low. The dollar also has depreciated 0.9% against the Swiss franc and shows losses of 0.7% relative to sterling and 0.6% versus the euro (which is hovering around a 3-month high) and Canadian dollar.
- Bitcoin‘s reprieve on Monday after Trump had revealed an intention to establish a strategic U.S. crypto reserve, slumped back 3% overnight and is currently over 20% weaker than its high three months ago.
- The price of oil also took a hit, dropping over 1% to a 4-month low, but the cost of gold rallied 1% and is hovering near record highs.
- Ten-year sovereign debt yields are down five basis points in the U.K., 2 bps in Germany and a basis point each in the United State, France, Italy and Spain. The 10-year Japanese JGB firmed a basis point, in contrast.
Japanese consumer confidence slipped further in February to a 23-month low in February. A 0.2% quarterly decline in Japanese business investment last quarter was considerably weaker than what forecasters were anticipating. Japanese labor market statistics were also reported today, putting February’s jobless rate at 2.5% for the third time in four months. The monetary base, over which the Bank of Japan exerts most direct control, fell 1.8% year-on-year in February after a 2.5% drop in January. Both declines were greater than that of 0.3% in last year’s final quarter or 1.0% average increase in 2024 as a whole.
The Greek manufacturing purchasing managers index for February printed at a 3-month low of 52.6. Non-oil purchasing manager indices in Egypt and Saudi Arabia fell to 2-month lows of 50.1 and 58.4. South Korea’s manufacturing PMI slid 0.4 index points to a 2-month low of 49.9.
The Reserve Bank of Australia, whose Official Cash Rate was reduced last month for the first time since a cut in November 2020, published minutes from that meeting that cite lower-than-expected CPI inflation last quarter for the action, but also stress a need to be cautious going forward and suggest that further easing in coming months may not be done.
Euroland’s jobless rate remained at a record low 6.2% for a third straight month in January. That’s down from 6.5% a year earlier, 6.7% in January 2023, and 8.1% in January 2021.
South African real GDP rebounded from a 0.1% contraction in the third quarter of 2024 with a 0.6% advance last quarter. GDP rose 0.6% on average in 2024, similar to 0.7% in 2023.
Likewise, Hungarian GDP growth, which had posted declines of 0.2% and then 0.6% in the middle quarters of 2024, rebounded 0.5% in the final quarter. Average economic growth in 2024 also was just 0.5%.
British shop prices in both January and February were 0.7% lower than in their year-earlier months, continuing a weak trend that contrasts with a 9% year-on-year advance at the May 2023 peak.
Filipino producer price inflation of 0.8% in January was its highest in 20 months. Romanian PPI inflation of -0.1% was even lower but still represented a 5-month high.
In Georgia, consumer prices rose 0.4% on month and accelerated to a 12-month 2.4% rate of increase, most in 22 months.
Australia’s current account (-A$ 12.5 billion) experienced its smallest deficit in three quarters during 4Q 2024, Retail sales in Australia rose 0.3% on month and 4.6% on year in January.
South Korean retail sales and industrial production during January were respectively unchanged and down 4.1% compared with the year-earlier month. Each posted a month-on-month decline as well to start the new year.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euroland unemployment, tariff war
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