Choppy markets on uncertainty over US import tariffs. US equities fall 2%. ECB cuts 25bps as expected. German rates continue to push higher in the wake of the move to ease the debt brake and ramp up defence and infrastructure spending

News on tariffs continues to inject volatility into markets.  Soon after we went to press yesterday the White House announced a one-month exemption for automakers that comply with the North American trade agreement known as USMCA, which drove stronger US equities into the close. In overnight news, Commerce Secretary Lutnick told CNBC that President Trump is likely to defer his 25% tariffs on Canada and Mexico for all goods and services covered by USMCA and President Trump confirmed this an hour later for Mexico, and we await any announcement for Canada. Trading in US equities has been choppy, and the market is falling rapidly as we go to print, with the S&P500 down around 2%.

US data showing the US trade deficit exploded higher to $131b for the month of January, a record – as forewarned by the advance goods estimate last week – got President Trump’s attention.  He posted on Truth Social “Massive Trade Deficit with the World, just announced, compliments of Sleepy Joe Biden! I will change that!!!”.  The reality is that imports shot up 10% as companies front-loaded activity to get ahead of the proposed tariffs.  Nevertheless, data like these will only encourage President Trump to go ahead with his “reciprocal tariffs” plan next month in a belief that these will reduce the deficit.

Initial jobless claims fell 21k last week to 221k, confirming that last week’s spike higher was not indicative of a sudden deterioration in the labour market. That said, continuing claims rose to an almost three-year high and separate data from Challenger and Co showed February job layoffs soared to 172k in February, the highest number since mid-2020, led by federal government, retail and IT sectors. Some analysts say job losses of federal workers and the flow-on impact to the private sector could top half a million by the end of the year.

The ECB delivered the expected 25bps cut to its policy rates, taking the deposit rate down to 2.5%, its sixth rate cut since June. Language in the policy statement was changed to suggest that the monetary policy stance had become “meaningfully less restrictive”.  President Lagarde said that the disinflation process is well on track, but she wouldn’t commit on the path ahead for rates, saying that the backdrop is changing “dramatically” from one day to another. The market continues to see a slowdown in the pace of easing from here, with reasonable scope for a pause in the cutting cycle in April and two more full rate cuts this year which would take the deposit rate to 2%.

For the rates market, the ECB decision was a sideshow to larger forces in action in the wake of Germany’s decision earlier this week to ease the constitutional debt break in a bid to ramp up spending on defence and infrastructure. The superlatives around this game-changing decision have been flowing from media and analysts and the large reaction in European rates markets and the euro have continued to the direction of higher rates and a stronger EUR.

Following on from the massive 30bps lift in Germany’s 10-year rate yesterday, another 4bps have been tacked on, making it the worst German bond rout since 1990, and with spillover effects to other markets.  The UK has been an exception, where its 10-year rate has fallen 2bps.  The US 10-year rate traded at its highest level this week, with an overnight high of 4.34% and currently 4.30%, down slightly from the NZ close and up 2bps for the day.  The 2s10s curve has steepened 4bps, with the 2-year rate down back below 4%.

The USD is weaker for a fourth day running, with further broad weakness for the day – it is becoming more evident that USD strength in Q4 reflected the market front-running tariffs, meaning that their imposition isn’t necessarily USD-positive from here, and the constant threat of tariffs and uncertainty they are causing is driving a weaker US economy and confidence around the outlook.

EUR continued to push higher in the wake of Germany’s historic decision on fiscal policy, and with the ECB providing a supporting role. It traded above 1.0850 overnight for the first time since November and currently near 1.08. NZD/EUR found some support just under 0.53 and is currently 0.5320.

Safe-haven currencies CHF and JPY have been the strongest of the majors in the wake of policy uncertainty.  USD/JPY fell to a fresh five-month low of 147.30 and is currently down 1% overnight to 147.80.

Broad USD weakness has helped the NZD push up to around 0.5750 and the AUD to 0.6340. NZD/AUD has pushed up to 0.9060. GBP has been relatively flat, so NZD/GBP has recovered to 0.4460.

Global forces drove up NZ rates across the curve yesterday, with a steepening bias.  The 10-year NZGB rate closed up 9bps to 4.69%, outperforming the swaps market, with 10-year swap up 11bps to 4.23%. The 2-year swap rate rose 5bps to 3.49%. Hjgher rates into the weekly bond tender was a blessing, with lines well supported, although less so for the 2036s. Overnight, the Australian 10-year bond future is down 7bps in yield terms.

On the calendar, market focus will be on the US employment report, with the consensus expecting a 160k gain in non-farm payrolls, a steady unemployment rate of 4.0% and modest average hourly earnings growth of 0.3% m/m.  A number of Fed speakers will be out in force, including Governor Waller this morning and Chair Powell overnight. China trade data today and Canada’s employment report tonight will also be on the radar.