Slow Ride

January 14, 2025
6 min read

Slow Ride

  • Financial market risk sentiment recovers on a report Trump’s team is eyeing gradual tariff hikes. USD takes a hit. US and European equity futures are up while China’s CSI 300 Index rallied by over 2.5%.
  • US December PPI expected to point at sticky underlying inflation, strengthening the case for a more hawkish Fed.
  • Odds of a BOJ rate hike at the January 24 meeting increased to 60% from 50% yesterday.

USD hit new highs yesterday but then slipped across the board as risk sentiment recovered following favorable tariff news. Reports indicate that the Trump administration is considering a more gradual approach to tariff increase. Tariffs would rise by about 2% to 5% a month instead of the minimum tariffs of 10% to 20% on all imported goods, and 60% or higher on shipments from China. Reports saying the Trump team may water down tariffs are not new. On January 6, the Washington Post reported that the incoming administration will consider tariffs only on critical imports from every country. President-elect Donald Trump was quick to dismiss the report as “fake news.”

Regardless of tariffs, US economic outperformance should continue to drive the dollar and Treasury yields higher. The US December NFIB small business optimism index (11:00am London) and PPI (1:30pm London) are the highlights. PPI is expected at 3.5% y/y vs. 3.0% in November while core PPI is projected at 3.8% y/y vs. 3.4% in November. Watch-out for PPI services ex-trade, transportation, and warehousing because it feeds into the core PCE calculations. In November, this measure of core services PPI remained at a multi-month high of 4.6% y/y consistent with sticky underlying inflation.

Key central bank speakers today include: Bank of England Deputy Governor Sarah Breeden (8:30am London), Kansas City Fed President Jeff Schmid (3:00pm London) and New York Fed President John Williams (8:05pm London).

USD/JPY is range-bound around 157.40. Bank of Japan (BOJ) Deputy Governor Ryozo Himino reminded market participants that next week’s policy meeting is live on whether to resume raising rates or hold steady. Himino echoed the BOJ’s policy guidance noting “Developments in prices and inflation expectation, including the economic mechanisms behind them, seem to have been largely on the path…If this outlook will continue to be realized, the Bank will raise the policy interest rate accordingly and adjust the degree of monetary easing.” Odds of a BOJ rate hike at the January 24 meeting increased to 60% from 50% yesterday, while a March hike remains 80% priced-in. We expect the BOJ to wait until March to raise rates again as wage trend will be clearer by then. The BOJ’s cautious normalization cycle is an ongoing drag for JPY.

AUD/USD recovered to 0.6200 after testing fresh cyclical lows near 0.6131 yesterday. However, China’s unimpressive growth outlook, the Fed’s cautious easing stance, and the RBA about to start cutting the policy rate in February can further weigh on AUD/USD.

Australia’s Westpac–Melbourne Institute Consumer Sentiment Index dipped - 0.7% to 92.1 in January, from 92.8 in December and remains below the long-term average of 100.5. The details were mixed as current condition sub-indexes declined while the forward-looking ones were flat or increasing. RBA cash rate futures still imply about 70% probability of a 25bps cut at the February 18 meeting.

NZD/USD rallied back above 0.5600 supported by favorable tariff news. New Zealand’s Q4 business outlook survey was mixed. A net 26% of firms said their own trading activity deteriorated, suggesting the economy contracted for a third consecutive quarter in Q4. Encouragingly, a net 16% of companies expect the economy to improve in the next 12 months, the first positive reading since mid-2021 and the highest since 2017. The RBNZ has penciled-in another 50bps rate cut to 3.75% in February but warned of slower pace of easing after that, noting it does not forecast to slash the policy rate below neutral (around 3%) throughout 2027.

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