Blue Monday

Global stock markets remain under heavy downside pressure and bonds continue to rally. S&P 500 futures are down over 4% and is on course for its worst three-day selloff since the Black Monday crash of October 1987.

USD is mixed, underperforming mostly against the safe haven JPY and CHF while outperforming versus risk-sensitive currencies. The trade war is a major blow to the global economy and can further weigh on risk assets in the near-term. US President Donald Trump and his economic team insist they will not backdown on reciprocal tariffs which are due to take effect Wednesday.

Don’t expect the Fed to come to the rescue with an emergency rate cut. This is an entirely policy-driven market meltdown and there is no reason for the Fed to bail out financial markets. In fact, Fed Chair Jay Powell reiterated last Friday “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” Powell also acknowledged that the economic effects of tariffs “will include higher inflation and slower growth.” Heightened risk the US falls into stagflation is not USD supportive.

Nonetheless, interest rate futures have ramped-up odds of Fed funds rate cuts in the last week. Fed funds futures are pricing-in almost 150bps of easing in the next twelve months while the probability of a 25bps cut at the next May 7 FOMC meeting increased to 55% from 20% before the tariff announcement.

Today, Fed Governor Adriana Kugler speaks on inflation dynamics (3:30pm London). Last week, Kugler stuck to the Fed’s “no hurry to resume easing” script noting “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.”

CANADA

USD/CAD is holding on to Friday’s gains. The severe negative impact of the US tariffs on the Canadian economy and lower crude oil prices do not bode well for CAD. Bank of Canada (BOC) Q1 business outlook survey will be reported today (3:30pm London). Initial results from recent BOC surveys indicated that trade uncertainty was already prompting businesses to revise down their sales outlooks. Many businesses also reported scaling back their investment plans and hiring intentions. Markets are pricing in 70% odds of a follow-up 25bps BOC policy rate cut at the next meeting April 16 and 75bps of total easing over the next 12 months.

JAPAN

Japan underlying wage pressures slowed sharply in February. The policy-relevant scheduled pay growth for full-time workers unexpectedly eased to a 16-month low at 1.9% y/y (consensus: 3.0%) vs. 3.0% in January. However, the slowdown may have partly been due the leap-year effect. Regardless, the swaps market no longer price-in material odds of additional Bank of Japan (BOJ) rate hikes over the next 12 months. Despite this repricing, JPY continues to gain from save haven flows.

ISRAEL

Bank of Israel is expected to keep rates steady at 4.50% (2:00pm London). At the last meeting February 24, Bank of Israel kept rates steady at 4.50% and stated that “In view of the continuing war, the Monetary Committee’s policy is focused on stabilizing markets and reducing uncertainty, alongside price stability and supporting economic activity.”

The bank added that “The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.” The swaps market is pricing in steady rates over the next three months followed by 25bps of easing over the subsequent three months, followed by another 50bps over the subsequent six months.

ROMANIA

National Bank of Romania is expected to keep rates at 6.50%. At the last meeting February 14, the bank kept rates steady and Governor Isarescu warned against a rate cut as it “might sound like an invitation to weaken the currency.”