Tariffs Strike Back

November 26, 2024
6 min read

Tariffs Strike Back

  • Trump vowed to charge Mexico, Canada, and China with new tariffs. MXN and CAD underperform.
  • The US November Conference Board consumer confidence index is expected to point at resilient household spending activity.
  • Above-trend US real GDP growth and sticky underlying inflation suggest US interest rate expectations can adjust higher in favor of a firmer USD.

USD bounced-back against most major currencies as Trump’s tariff threat rocked the currency market. US equity futures are flat, European equity futures are down and the rally in US Treasuries paused.

President-elect Donald Trump warned he will charge Mexico, Canada, and China with new tariffs. In a social media post Trump wrote “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 1.4178, highest since April 2020. USD/MXN had a kneejerk rally above 20.7000. USD/CNH rose to a multi-month high around 7.2700.

Fed officials keep odds of a December Fed funds rate cut live. Yesterday, Chicago Fed President Austan 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.” And Minneapolis Fed President Neel Kashkari (non-voter) said “Right now, knowing what I know today, still considering a 25-basis-point cut in December — it’s a reasonable debate for us to have.” Fed funds futures continue to imply over 50% probability of a 25bps rate cut at the upcoming December 18 meeting and less than 75bps of easing over the next 12 months. In our view, above-trend US real GDP growth and sticky underlying inflation indicate US interest rate expectations can adjust higher in favor of a firmer USD.

Today, the data highlight is the November US Conference Board consumer confidence index (3:00pm London). Consumer confidence is expected at 111.4 vs. 108.7 in October and would 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, consistent with resilient household spending activity. Indeed, positive US real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.

The FOMC November 6-7 meeting minutes are published later today (7:00pm London). At that meeting, the FOMC delivered on expectation and trimmed the Fed funds rate 25bps to a target range of 4.50-4.75%. The decision was unanimous, and the message 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, Fed Chair Jay Powell emphasized “the Fed is not in a hurry to get to neutral”, adding “the economic activity data have been stronger than expected” while “inflation data wasn’t terrible but higher than expected.”

EUR/USD is directionless under 1.0500. Yesterday, a few ECB officials made the case for a gradual easing cycle. Chief Economist Philip 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.” Meanwhile, 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.”

GBP/USD is trading on the defensive under 1.2600. UK retail outlet price pressure still in deflation. The BRC shop price index fell -0.6% y/y in November vs. -0.8% in October. Nevertheless, according to estimates from the Bank of England (BOE), the Autumn Budget 2024 is expected to provisionally boost CPI inflation. This argues for a cautious BOE easing cycle. Odds of a 25bps BOE policy rate cut at the December 19 meeting are low at about 14%. BOE Chief Economist Huw Pill speaks on economic inactivity (3:00pm London).

USD/CAD is vulnerable to more upside over the next few months on broad USD strength and dovish Bank of Canada (BOC) policy stance. The BOC has room to dial up easing. Inflation in Canada is now close to 2% y/y, inflationary pressures are no longer broad-based, and monetary policy remains too tight. Market is pricing-in 23% odds of 50bps BOC rate cut at the December 11 meeting. BOC Deputy Governor Rhys Mendes speaks in a speech titled “Inflation at 2%: the role of monetary policy going forward” (1:20pm London).

NZD/USD plunged to one-year low near 0.5800. The spotlight is on the RBNZ meeting and the updated Monetary Policy Statement (tomorrow, 1:00am London). The RBNZ widely expected to slash the Official Cash Rate (OCR) 50bps to 4.25%. The market implies a 25% probability of a 75bps cut. At its October meeting, the RBNZ cut the OCR 50bps and noted that “economic activity in New Zealand is subdued, in part due to restrictive monetary policy.” Indeed, the OCR is above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%. The implication is the RBNZ will likely front-load the easing implied in its updated OCR forecast which can further weigh on NZD. The market is pricing-in the OCR to bottom around 3.25% in the next 12 months.

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