Market anxiety rises after Trump dodges question on recession. US equities tumble, led by the mega cap stocks; Nasdaq index down over 4%. Weaker risk sentiment supports US Treasuries and JPY

Newsflow has been light to start the week but increased anxiety over President Trump’s policy agenda, particularly tariffs and slashing Federal government spending, continues to impact the market, with much lower equities and Treasury yields falling. Of note, President Trump wouldn’t rule out his policies causing a recession.  On a Sunday Fox news interview he said “I hate to predict things like that.  There is a period of transition, because what we’re doing is big”.

That comment only added to the anxiety of investors.  The S&P500 has fallen for three successive weeks, including last week’s chunky 3.1% fall. In early afternoon trading the index has fallen another 2½%, led by the mega cap stocks, with the “Magnificent 7” down nearly 6%, contributing to a 4% fall in the Nasdaq index.  The cumulative fall in the S&P500 over recent weeks is now over 8%, while the Nasdaq index is down over 13%. Weaker US equities spilled over to Europe, with the Euro Stoxx 600 index closing down 1.3%.

Investors are eyeing up mid-week for the next tariff announcement, with US Steel and Aluminium tariffs scheduled to ratchet up to 25% for all countries from 12 March. The EU’s Trade Commissioner said that the US administration “does not seem to be engaging to make a deal”, after the two sides agreed last month on issues they could work on that would benefit both sides. He added that the EU intends to retaliate if the US proceeds.

The rising chance of a US economic recession and weaker risk appetite have supported Treasuries, with the US 10-year rate down 8bps from last week’s close to 4.21%, albeit still well shy of last week’s low of 4.1%.  By contrast, European rates show little net movement.

The economic calendar has been light.  Yesterday, Japanese wages data added to the evidence of sustainably higher inflation, with base pay rising at its fastest rate in over three-decades, supporting the case for further BoJ rate hikes. Japanese bond yields continue to push up to fresh multi-decade highs. Overnight, German industrial production rose a stronger than expected 2.0% m/m in January, led by a rebound in autos. In the US, the Fed’s survey of inflation expectations showed steady rates of 3% for the longer term measures.

In Germany, the Green party said it would reject Chancellor-in-waiting Merz’s plan to create a €500bn infrastructure fund and change the country’s limits on debt to allow unlimited borrowing to fund defence.  The vote of the Green party is required to push through the plan to meet the two-thirds super majority required. They have spat the dummy as they weren’t privy to discussions, but there’s a deal to be done this week to get their vote, and the market didn’t take the news seriously. The massive projected easing in German fiscal policy was behind the sharp recovery in EUR and much higher German bond rates since the plan was announced last week.

In currency markets, net movements have been modest, apart from clear JPY outperformance and CAD underperformance.  USD/JPY is down 0.6% from last week’s close to 147.15 after making a fresh five-month low around 146.65, supported by weaker risk appetite and rising JP-US rate spreads. USD/CAD is up 0.4% to 1.4440. In Canada, Mark Carney decisively won leadership of Canada’s Liberal party and will become the new PM in coming days, replacing Justin Trudeau. In his victory speech he seemed prepared to take on the fight with President Trump and claimed, “Canada will win”.

After last week’s 2% gain, the NZD has consolidated around 0.5720, while the AUD has slipped just below 0.63, seeing NZD/AUD push up to 0.9080. The NZD is higher on all the key crosses apart from NZD/JPY, where it is down towards 84.

In the domestic rates market, there were minimal changes in yields, with NZGB rates up 1bp across the curve, and swap rates unchanged.  The next key domestic economic release is GDP next week. In the day ahead, a number of Q4 NZ activity indicators will be released, allowing us to finalise our GDP estimate for the quarter, currently looking like a small positive expansion.  Globally, there are only second tier economic releases, the more interesting one being the US JOLTS report on the labour market.