Markets Roiled by Trump Tariff Threats

November 26, 2024

Win Thin

President-elect Trump is already playing the tariff card; FOMC minutes will be released; some Fed officials are keeping a December rate cut live; Conference Board consumer confidence for November will be the data highlight; Brazil reports mid-November IPCA inflation
Banque de France Governor Villeroy called for a clear fiscal strategy from the French government; ECB officials made the case for a gradual easing cycle; minor U.K. data came in soft
China continues to lean against yuan weakness

The dollar is mixed even as Trump roiled markets with tariff threats. MXN, CAD, and CNY are underperforming after being singled out by Trump (see below). However, the dollar is overall mixed and DXY is trading flat near 106.848. The euro is trading higher near $1.0515 after Trump omitted Europe from his tariff threats. USD/JPY is trading lower near 153.75 while sterling is trading slightly higher near $1.2580. We look for this dollar rally to continue after this current period of consolidation. While the election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. The policies that incoming Treasury Secretary Bessent are prioritizing will support this narrative, not derail it. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

President-elect Trump is already playing the tariff card. Complaining about the flow of migrants and drugs coming into the U.S., Trump wrote In a social media post that “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on ALL products coming into the United States, and its ridiculous Open Borders.” Trump added “we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America.” The currency market reaction was swift. USD/CAD surged to a high near 1.4180, the highest since April 2020, while USD/MXN had a knee-jerk rally above 20.75 and USD/CNH rose to a multi-month high above 7.2700. The euro is seeing a bit of a relief rally as Trump did not threaten Europe with tariffs, at least for now.

FOMC minutes will be released. At the September 17-18 meeting, the Fed delivered the expected 25 bp cut. The decision was unanimous but the messaging signaled a cautious easing cycle. The FOMC press release scrapped previous reference that it had gained greater confidence that inflation is moving sustainably toward 2%. Moreover, Chair Powell emphasized “the Fed is not in a hurry to get to neutral” and added that “the economic activity data have been stronger than expected” while “inflation data wasn’t terrible but higher than expected.”

Some Fed officials are keeping a December rate cut live. Yesterday, Chicago Fed President Goolsbee (2025 voter) noted “Barring some convincing evidence of overheating, I don’t see the case for not continuing to have the fed funds rate decline.” Minneapolis Fed President Kashkari (non-voter) said “Right now, knowing what I know today, still considering a 25 bp cut in December — it’s a reasonable debate for us to have.” Fed funds futures continue to imply nearly 60% odds of a 25 bp cut at the upcoming December 18 meeting. We will have one more each of the jobs, CPI, PPI, and retail sales reports to digest ahead of that meeting so the odds will remain in flux. Looking ahead, the swaps market is pricing in a terminal rate around 3.75%, which is nearly a full percentage point above the Fed’s expected long-term rate of 2.875% in the September Dot Plots.

Conference Board consumer confidence for November will be the data highlight. Headline is expected at 111.4 vs. 108.7 in October. If so, it would be the highest since July 2023 but would largely remain within the same narrow range that’s held throughout the past two years. In October, the expectations index surged 6.3 points to 89.1, the highest level since December 2021, and indicative of resilient household spending activity. Indeed, positive U.S. real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.

Regional Fed surveys for November will wrap up today. Philly Fed non-manufacturing, Richmond Fed manufacturing and services, and Dallas Fed services surveys will all be reported today. Yesterday, Dallas Fed manufacturing survey came in at -2.7 vs. -1.8 expected and -3.0 in October.

Chicago Fed National Activity Index for October was soft. Headline came in at -0.40 vs. -0.28 expected and a revised -0.27 (was -0.28) in September. As a result, the 3-month moving average fell to -0.24 vs. a revised -0.21 (was -0.19) in September but still remains well above the -0.7 threshold that typically signals recession. That said, the negative headline readings bear watching as they imply below-trend growth.

Brazil reports mid-November IPCA inflation. Headline is expected at 4.64% y/y vs. 4.47% in mid-October. If so, it would be the highest since mid-December 2023 and above the 1.5-4.5% target range. At the last COPOM meeting, the central bank hiked rates 50 bp to 11.25% and noted that “The Committee stresses that a credible fiscal policy committed to debt sustainability, with the presentation and execution of structural measures for the fiscal budget, will contribute to the anchoring of inflation expectations and to the reduction in the risk premia of financial assets, therefore impacting monetary policy.” Next meeting is December 11 and the CDI market is pricing in a 75 bp hike to 12.0%. Looking ahead, the swaps market is pricing in nearly 300 bp of total tightening over the next 12 months that would see the policy rate peak near 14.25%, up from 13.5% in early November.

EUROPE/MIDDLE EAST/AFRICA

Banque de France Governor Villeroy called for a clear fiscal strategy from the French government. He noted that “Investors who lend to France and French people themselves, both households and companies, expect clarity and confidence on how we will reduce our deficits and control our public debt.” Villeroy added that any confusion would lead to higher borrowing costs and that “the more there is uncertainty instead of confidence, the more businesses and small firms risk delaying investment and hiring.” France has been on the back-burner lately but spreads to Germany are starting to widen out again. Indeed, France is trading wide to Portugal and Spain and is nearing Greece now, something that was unthinkable just months ago.

Meanwhile, a few ECB officials made the case for a gradual easing cycle. Chief Economist Lane said a “step-by-step strategy enables us to observe the responses of the economy to our decisions and continuously refine our understanding of their impacts.” Elsewhere, Governing Council member Nagel noted “it is important to remain cautious and to loosen monetary policy only gradually and not too quickly.” Finally, Governing Council member Makhlouf was more open minded about the speed of rate cuts “given the volatility and the data and the substantial uncertainty regarding economic policy in trade partners.” The market sees 25% odds of a jumbo 50 bp cut at the December 12 meeting, down from 50% last week. Looking ahead, the swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom at 1.75%. Villeroy (twice), Centeno (twice), Rehn, Muller, and Kazaks speak today.

U.K. retail outlet price pressures remain in deflation. The BRC shop price index fell -0.6% y/y in November vs. -0.8% in October. This reading suggests some downside risks to CPI data out December 18. However, according to estimates from the Bank of England, the Autumn Budget 2024 is expected to provisionally boost CPI inflation. This argues for a cautious BOE easing cycle. Odds of a 25 bp rate cut at the December 19 meeting remain low at about 10%. However, the swaps market now sees the terminal rate at 3.75% vs. 4.0% before the weak November PMI reading. BOE Chief Economist Pill speaks today.

U.K. CBI distributive trades survey for November was soft. Retailing reported sales came in at -18 vs. -15 expected and -6 in October, while total reported sales came in at -17 vs. -12 in October. This reading suggests some downside risks to official retail sales data out December 20.

ASIA

China continues to lean against yuan weakness. Since early November, the PBOC has kept the daily fix fur USD/CNY below 7.20. Indeed, the bank set the fix today at the lowest level since last Monday even as USD/CNH traded at the highest level since July 30 in response to Trump’s tariff threats.

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