Large fallout from Trump tariffs pared back after delay for Mexico announced. Less reaction in the rates market due to offsetting forces; UST curves show mild flattening. NZ rates show notable fall

The new week began with the fallout from President Trump’s announcement Friday on tariffs on the three largest trading partners of the US, under the auspices of a national emergency regarding illegal immigration and drugs entering the US. As markets opened, the USD soared and equity futures plunged, while the US Treasuries curve flattened. These moves have shown some reversal overnight after Trump agreed to delay the tariffs on Mexico by a month.

While President Trump deemed “tariff” as the most beautiful word in the dictionary, the early market reaction was ugly. S&P500 futures opened the Asian trading session down 2% and major currencies plunged against the USD to fresh multi-year lows, with moves extending through to the NZ close. CAD and MXN weren’t the only currencies affected, the EUR was also whacked as Trump said tariffs will “definitely happen” with the EU.

The key news overnight was a call between President Trump and President Sheinbaum which resulted in Mexico agreeing to send 10,000 National Guard officers to the border to stem the flow of fentanyl and migration into the US.  On the basis of this, Trump agreed to delay the tariffs against Mexico for one month and agreed to speak frequently during that period. This resulted in some reversal of the market movements. It is fair to say that the situation remains fluid.

Trump and Canada PM Trudeau are expected to talk later today. Canada’s initial response to the US tariffs was to give details of its first phase of retaliation, which will immediately impact CAD30b of US exports, with another CAD120b of US exports impacted in three weeks. Ontario’s premier took additional measures, cancelling its contract with Musk’s Starlink company and banning US companies from provincial contracts until the tariffs are removed.

China’s Commerce Ministry issued a statement expressing strong dissatisfaction and vowing corresponding countermeasures and pledged to file a complaint at the WTO.  Just after the NZ close, the WSJ reported that China would try to restore the Phase One deal of 2020, talk with the White House about areas China could buy more from the US, offer to make more investments in the US, and renew a pledge not to devalue the yuan to gain competitive advantage.

As far as markets stand as we go to print, the S&P500 is currently down “only” 0.8%, recovering from a 1.9% loss just ahead of the report of Mexico’s one-month reprieve. The Euro Stoxx 600 index closed down 0.9%.

The USD DXY index is up ½%, paring about two-thirds of its gain at its peak.  The NZD, EUR and AUD are down the most since last week’s close, down 0.6-0.75%, with a smaller 0.3% loss for the CAD, GBP is flat and the yen is 0.3% stronger, reflecting its safe-haven characteristics.

The NZD traded a low of 0.5516 yesterday, just ahead of the October 2022 intraday low of 0.5512, and thereby maintaining 0.55 or thereabouts as a key support level. The noted WSJ article on China resulted in a turnaround in sentiment and further NZD recovery was made after the updated deal with Mexico, which saw the NZD temporarily regain the 0.56 handle and it currently sits just below that mark.

The CAD turnaround is remarkable, with the market likely assuming some deal that delays tariffs or that they do not prevail for long.  USD/CAD almost reached 1.48 and it currently trades just below 1.46. The AUD traded a low of 0.6088 and it currently sits nearly a cent higher. With the NZD near the bottom of the daily leaderboard, key crosses are flat to lower, the largest move being a 1.2% fall against JPY to 86.5.

Chinese New Year holidays mean that we will have to wait until Wednesday for the PBoC’s decision on where to fix the USD/CNY exchange rate. Cryptocurrencies were particularly whacked, with many down more than 20%, before a recovery ensued. Bitcoin traded down towards $91k but has since recovered to over $98k.

The reaction in rates markets has been mixed, with investors weighing the offsetting forces of the inflationary impact of tariffs against their growth-sapping attributes. The net result is flatter curves, with upside pressure on short-term Treasury yields against downside pressure on longer rates. In an environment of higher inflation, there is less scope for the Fed to cut rates and, as such, market pricing for the Fed this year has been pared a little, with 39bps of cuts priced through to year-end. The 2-year rate is currently up 4bps to 4.24% while the 10-year rate is down 2bps to 4.52%.

In the oil market, the initial market reaction was one of higher prices, but the gain has been pared and prices are only up modestly for the day.

In economic news, the US ISM manufacturing index rose 1.7pts to 50.9, above the 50.0 consensus and the first reading above 50 since October 2022. It’s hard to know how much of the increase reflected increased activity ahead of expected tariffs but what does seem clear is that a fresh salvo of tariffs is negative for the sector, and the market rightly played little attention to the survey. Euro area CPI inflation rose a tenth more than expected, with the headline at 2.5% y/y and the core at 2.7% y/y, however the data aren’t expected to get in the way of further ECB easing.

In the domestic rates market, yields were lower across the board, with strong receiving interest in the swap market and against a backdrop of Australian rates falling. NZGB yields fell 6-7bps across the curve. The 2-year swap rate fell 8bps to 3.36%, a new low for the cycle while the 10-year rate fell 6bps to 4.03%. Since the NZ close, the Australian 10-year bond future has oscillated in an 8bps range and the yield is currently up marginally.

In the day ahead the market will remain focused on the fluid tariff situation.  On the economic calendar, NZ building consents and the US JOLTS report will be released. During the NZ trading session, St Louis Fed President Musalem will be speaking.