Smooth Operator

February 14, 2025
6 min read

Smooth Operator

  • Expectation for a targeted and graduate implementation of tariffs soothe market jitters. USD down, US equity futures up, and Treasury yields drifting lower.
  • US January retail sales report takes the spotlight today. The favorable consumer spending backdrop suggests the bar for additional Fed funds rate cuts is high.
  • French President Macron warned of the risk of failure for the EU if the bloc does not “muscle up” on defense and the economy.

USD is down near its lowest level since end-January on favorable risk sentiment. Expectation for a targeted and graduate implementation of tariffs minimize financial market uncertainty and is supportive of risk assets.

Yesterday, US President Donald Trumps signed a Presidential Memorandum ordering the development of a comprehensive plan dubbed the “Fair and Reciprocal Plan” that would impose new tariffs on a country-by-country basis. US Commerce Secretary nominee Howard Lutnick said those studies should be completed by April 1, and reciprocal tariffs could start as early as April 2. A report on the fiscal impact of the tariffs will be delivered within 180 days.

According to US officials, reciprocal tariffs would consider for instance VAT, taxes on US products, and non-tariff barriers. This is in line with US Treasury Secretary Scott Bessent’s proposal that new tariffs would be based on a long list of trade and national security criteria which might lead to higher or lower tariffs. In Bessent’s words, “more clearly segmenting the international economy into zones based on common security and economic system would help…highlight the persistence of imbalances and introduce more friction points to deal with them.”

US

USD downside is limited as the US will maintain a wide bond yield advantage against all other major economies. In the wake of the hot US January CPI, PPI overshot expectations in January, adding to evidence that the disinflation process is stalling well above 2%. Headline PPI was 3.5% y/y (consensus: 3.3%) vs. 3.5% in December (revised up from 3.3%) and core PPI was 3.6% y/y (consensus: 3.3%) vs. 3.7% in December (revised up from 3.5%).

PPI services ex-trade, transportation, and warehousing printed at 4.0% y/y vs. 4.2% in December (revised up from 3.9%), suggesting the policy relevant core PCE deflator will remain sticky above 2%. Indeed, the Cleveland Fed’s Nowcast model forecasts core PCE at 2.7% y/y in January vs. 2.8% in December. Looking ahead, the model sees February core PCE at 2.6% y/y.

The US January retail sales report is today’s data highlight (1:30pm London). Consensus sees headline at -0.2% m/m vs. 0.4% in December. More importantly, the retail sales control group used for GDP calculations and which excludes volatile items like car sales, is projected at 0.3% m/m vs. 0.7% in December. Overall, consumer spending is supported by positive real wage growth, healthy labor market and strong household balance sheet. Dallas Fed President Lorie Logan (2026 FOMC voter) participates in a moderated Q&A later today (8:00pm London).

EUROZONE

EUR/USD is trading near its highest level since January 27. But ECB/Fed policy trend and the geopolitical landscape can further weigh on EUR/USD. US President Donald Trump has extended an olive branch to China and Russia. In contrast, he described the EU as “very nasty,” pointing out the bloc has been “very tough on our companies.”

French President Emmanuel Macron warned of the risk of failure for the EU if the bloc does not “muscle up” on defense and the economy. Macron called for abandoning the fiscal straight jacket of the EU’s growth and stability pact and rolling back onerous EU regulations. However, there are significant constraints to deeper EU integration, Germany is a one and the rise of populist parties across Europe is another.

The Eurozone 2nd Q4 GDP estimate is due today (10:00am London). The preliminary estimate saw real GDP growth come in a tick lower than expected at 0% q/q vs. 0.4% in Q3. France contracted -0.1% q/q vs. 0.4% in Q3, Germany contracted -0.2% q/q vs. 0.1% in Q3, and Italy was flat q/q vs. flat in Q3. All three were a tick lower than expected. Spain was the lone bright spot as it reported stronger than expected growth of 0.8% q/q vs. 0.8% in Q3.



Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction