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.

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