Parabellum

The US tariff announcement has triggered significant volatility in financial markets. Global stock markets are plunging, and bonds are rallying. The trade war is a major blow to the global economy and can further weigh on risk assets in the near-term. Meanwhile, USD has taken a beating against most major currencies on narrowing US-G6 2-year bond yield spreads.

Yesterday, the US unveiled its “Reciprocal Tariff to Rectify Trade Practices” plan. The measures include a baseline tariff of 10% on goods imports from all trading partners plus country-specific reciprocal rates that range from 10% to 50%. For example, China is set to pay a 34% tariff stacked on top of the 20% duties already imposed this year. The European Union will see a 20% levy, the UK faces a 10% rate, while Japan will be subject to a 24% tariff. The baseline tariff will take effect from 12.01am Saturday April 5, while the higher reciprocal tariffs would apply from 12.01am on Thursday April 9.

Mexico and Canada have been spared reciprocal tariffs for now because they are already subject to a 25% blanket levy on all US imports not covered by the United States-Mexico-Canada Agreement (USMCA). Other exemptions to reciprocal tariffs include: (i) automobiles and automotive parts as a 25% levy went into effect today, (ii) steel and aluminum because a 25% tariff already kicked-in last month.

China, the EU, and other countries pledged counter measures on the US. But US Treasury Secretary Scott Bessent warned “I wouldn’t try to retaliate…As long as you don’t retaliate, this is the high end of the number.”

Fed Governor Adriana Kugler stuck to the Fed’s “no hurry to resume easing” script. Kugler said “I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.”

However, the Fed’s path to bring about disinflation without a significant slowing of the economy or high unemployment is narrowing. The US growth outlook is increasingly cloudy and there’s some loosening in inflation expectations. In response, Fed funds futures are now pricing-in a full 100bps of easing over the next twelve months. That’s up from 75bps in mid-March, 50bps in late February, and 25bps in mid-January. The downward adjustment to US rate expectations is a major drag on USD.

Today, the March ISM services index will offer a timely update on US economic activity (3:00pm London). Headline is projected at 52.9 vs. 53.5 in February. The regional Fed ISM services prints suggest risk are skewed to the downside. Of note, the S&P Global services PMI increased 3.3 points to a three-month high at 54.3 in March.

US weekly jobless claims, the March Challenger job cuts report, and February trade balance are also due today. Fed Vice Chair Philip Jefferson and Fed Governor Lisa Cook speak on the economic outlook (5:30pm & 7:30pm London, respectively).

The US goods and services deficit is expected to narrow to -US$123.5bn after widening to a record -US$131.4bn in January. Most of the widening in the trade deficit since November reflects higher gold bar imports (defined as finished metal shapes), which are excluded from GDP because they are considered valuables that are not consumed or used for production.

EUROZONE

EUR/USD surged to near 1.1000, highest level since October 2024, on broad USD weakness. The ECB will release the Account of its March 5-6 policy meeting today (12:30pm London). At that meeting, the ECB delivered on expectations and trimmed the policy rate 25bps to 2.50%. Importantly, the ECB stressed that “monetary policy is becoming meaningfully less restrictive” suggesting the bulk of easing is done. ECB President Christine Lagarde noted “the decision was a consensus, and no one opposed that decision”, adding only that Governor Holzmann, a staunch hawk, abstained.

Markets price-in 88% odds of a 25bps ECB cut to 2.25% at the April 17 meeting. Recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live. Indeed, the more ECB officials appear ready to accept an April rate pause according to news report.

We expect the ECB to deliver a cut next month to pre-empt the drag to growth from US tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates below the neutral policy settings. ECB staff estimate the neutral rate at 1.75%-2.25%. The likelihood for a modest upward adjustment to ECB rate expectations is EUR supportive.

UK

GBP is up versus USD but down against EUR. EUR tends to outperform GBP in periods of heightened risk aversion due to the Eurozone’s current account surplus. In Q4, the Eurozone recorded a current account surplus of 2.8%, while the UK had a deficit of -2.7% of GDP.

The Bank of England’s (BOE) Decision Maker Panel (DMP) survey of inflation expectations for March is up next (9:30am London). In February, 1-year expectations picked up a tick as expected to 3.1%, which was the highest in nearly a year, while 3-year expectations picked up two ticks to 2.9% and reversed the January drop. Both series remain above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path. The swaps market is pricing in 75bps of total easing over the next 12 months.

SWITZERLAND

CHF rallied against most major currencies on souring financial market risk sentiment. Swiss inflation remained muted in March and in line with the SNB’s projection. Headline CPI came in at 0.3% y/y (consensus: 0.4%, SNB Q1 projection: 0.3%) vs. 0.3% in February while core matched consensus at 0.9% y/y vs. 0.9% in February.

At its last March 19 meeting, the Swiss National Bank (SNB) trimmed the policy rate 25bps to 0.25% but hinted at little appetite for more easing. President Martin Schlegel highlighted that “this rate cut has an expansionary impact…In that sense, the probability of additional policy easing is naturally lower.” The market implies a 25bps cut in the next 12 months and the policy rate to bottom at 0%.