Little Respite for Worried Investors – Currency Thoughts
Little Respite for Worried Investors
April 7, 2025
The heavy selloff of riskier assets extended dynamically into a fresh week. President Trump has shown no inclination of blinking first on his broadly based and very large tariff hikes. Reactions by other countries have been mixed. The ten-year U.S. Treasury yield eased another basis point and is now below 4.0%. Comparable German bund and Japanese JGB yields are down by seven and eight additional basis points today. Bitcoin’s price is 2.0% lower, and West Texas Intermediate oil is down 2.3%. The dollar remains volatile, with gains of 0.6% versus sterling and at least 1% against the Mexican peso and Turkish lira but losses of 0.7% against the Swiss franc and 0.3% relative to the Japanese yen.
The only bright observation in equities is that current levels are above their intra-day lows in many cases. Today’s largest net move has been a 13.2% plunge in Hong Kong’s Hang Seng index, followed by -9.7%, -7.8% and -7.3% in Taiwanese, Japanese and Chinese share prices. Equities in the U.K., Germany, France, Italy, Spain Australia, Pakistan, and Malaysia are 4.0% or more weaker. Key U.S. futures show losses of 3.2% in the Russell 2000, 2.5% in the SPX, 2.4% in the Nasdaq, and 2.1% in the DJIA.
It’s inevitable that policymakers at the Federal Reserve will attract increasing attention, with calls for it to cut interest rates in light of the weaker outlook for economic growth and in order to avoid a recession in 2025. Markets are again discounting more than 50 basis point of easing later this year, but the decision will not be an easy one, since the tariffs, deportations, heavy cuts of federal workers and second-order effects from policy-related uncertainty all point to higher inflation or, at best, stalled disinflation well above the 2.0% target. Fed officials would ideally like to actually see weaker hard data before resuming interest rate cuts. To make a dramatic easing before such evidence emerges would invite accusations of caving in order to avoid increasingly harsh criticism from President Trump. Many recently released U.S. hard economic indicators have exceeded expectations such as the 228k advance in non-farm payroll employment last month and February increases of 0.7% in industrial production, 0.8% in personal income, 0.4% in personal consumption expenditures, 0.6% in factory orders and 0.3% (3.8% year-on-year) in wage growth. U.S. real GDP last quarter rose 2.4% annualized compared to the prior quarterly level, almost as much as the average increase of 2.8% in all of 2024. It’s also true that President Trump has a proven track record of intimidating many foes, whether it be politicians in his own party, leaders of the Democratic Party opposition, and the heads of countries that he has threatened.
Unlike the United States, a trade war is catching the rest of the world and particularly Europe, Canada, China and Japan at a vulnerable time. Among data reported this Monday,
- German industrial production sank 1.3% on month and 4.0% on year in February after falling 4.5% on average during 2024.
- The Sentix monthly measure of investor sentiment in the euro area tumbled back 16.6 index points to an 18-month low of -19.5 this month.
- Britain’s Halifax index of house price inflation in March matched February’s 2.8% seven-month low.
- Retail sales in February fell by 1.7% in Bulgaria, 0.6% in Hungary, 1.0% in Romania and 0.5% in Estonia.
- Austrian wholesale prices fell 0.8% on month in March and were 0.2% below their year-earlier level.
- A comparison of German February exports and imports to year-earlier levels saw the former drop 1.8% and latter rise 3.1%.
- Japan’s index of leading economic indicators retreated in February from January’s uptick to 108.2, matching the readings in November and December.
On the central bank watching front, speculation picked up today that authorities at the People’s Bank of China are edging closer to a decision to cutting interest rates and/or their required reserve ratio. The last cut of the 1- and 5-year loan prime rates was made in October of last year. As expected, too, officials at today’s scheduled monetary policy review at the National Bank of Romania kept their key interest rate unchanged at 6.5%, where such has been since a pair of quarter percentage point reductions last July and August. The rate had previously stayed at a peak of 7.0% for a year and a half. Romanian CPI inflation currently stands at 5.0%, 1.5 percentage points above the central bank target range ceiling.
Likewise, officials at the Bank of Israel’s scheduled policy review today left their key rate at 4.5%, the level since a single 25-basis point cut at the start of 2024. CPI inflation is closer to target (3%) in Israel than in Romania, but the resumption of active war with Hamas creates fresh uncertainties that warrant monetary caution.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Israel, equity market selloff, German industrial production, National Bank of Romania
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