Trump and Putin talk but make little progress. Germany's lower house approves massive fiscal plan to boost defence and infrastructure spending. US equities weaker, US Treasuries continue to consolidate

After two positive days, US equities are back in the red, with the S&P500 down 1% in early afternoon trading, weighed down by the mega techs. US Treasury yields continue to consolidate.  The 10-year rate has traded a 4.27-4.33% range and currently sits at the bottom end, down a touch from the NZ close.

President Trump’s call with President Putin lasted an hour and a half and the result is a very small step forward on the road to peace.  They agreed to an energy and infrastructure ceasefire and to begin negotiations on a maritime ceasefire in the Black Sea, full ceasefire and permanent peace”. Putin imposed several conditions for a lasting ceasefire, including suspension of arms and intelligence support for Ukraine. Market reaction was minimal, with expectations low for any substantial move forward.

The WSJ reported discussions by Trump’s team on how to impose reciprocal tariffs. They weighed on whether to simplify the complex task of devising new tariff rates for hundreds of US trading partners by instead sorting nations into one of three tariff tiers, but that has been ruled out in favour of an individualised approach. That seems impossible to achieve, particularly given the tight deadline ahead of their introduction on 2 April but it still looks to be the direction of travel.  Officials expect they will account for value-added taxes on consumption. In the case of NZ, that means an automatic tariff rate of 15% in line with NZ GST at that rate.

As expected, Germany’s lower house approved Chancellor-in-waiting Merz’s plan to loosen the debt brake and unleash a significant easing in fiscal policy directed at boosting defence and infrastructure spending. The package includes theoretically unlimited defence spending and an off-budget €500b infrastructure fund.  The package could add 1½-2% to German GDP over the next decade or so, reflected in the co-leader of the Social Democrat saying, “this is possibly the biggest spending packaged in the history of our country”. There are a few more boxes that need to be ticked before being signed into law, but the deal is as good as done.

Much of the market reaction to this package already occurred earlier this month and Germany’s 10-year rate immediately fell 3bps when news of the vote was released, after pushing higher ahead of the vote. The net change on the day has been minimal, with consolidation over recent days and the rate still up over 40bps for the month to date.

Canadian CPI inflation picked up and was stronger than expected, with the annual headline increase at 2.6% y/y in February, up from 1.9% the previous month and the average of the trimmed mean and median rising to 2.9% from 2.7%. The end of a sales tax break only partly explained the increase, and the move higher in inflation came ahead of the US-Canada tariff trade war. The data didn’t significantly impact the market but solidified the consensus view that the Bank of Canada will take a pause in the easing cycle.

US industrial production rose by a stronger than expected 0.7% m/m in February, driven by a surge in autos. Activity was likely brought forward ahead of the imposition of 25% tariffs on Canada and Mexico and thus higher activity is unlikely to be sustained. Housing starts surged 11.2% m/m in February, impacted by the weather, with the strong pick-up following the weather-affected slump in January. Building permits, which are much less affected by the weather, fell 1.2% m/m, in line with expectations.

In currency markets, net movements have been modest. The NZD has tracked a range of not much more than 30 pips, dipping just below 0.58 overnight from a high just over 0.5830 and currently mid-range. The AUD has modestly underperformed, and NZD/AUD continues to push higher, heading towards 0.9150, possibly the first line of resistance, as occurred in December. EUR and GBP have made modest gains to around 1.0950 and 1.30 respectively and the NZD is slightly weaker on these crosses.

There’s little to say about the domestic rates market, with rates barely changed (1bp or less) across the NZGB and swaps curves yesterday. There’s also little to say about the overnight GDT dairy auction overnight, with the price index unchanged and minimal price movements for whole milk and skim milk powders.

In the day ahead, NZ consumer confidence and current account data are released. The BoJ’s latest policy decision will be announced later this afternoon, with policy widely expected to remain on hold despite strong wage and price inflation – the snail’s pace of lifting rates is seen to continue. The Fed’s latest policy announcement comes at 7am tomorrow NZ time, with a widely held view of no change in rates, and no change to the median projection of two rates cuts this year as expressed in the dot plot, alongside a downward revision to growth and upward revision to inflation projections.  Fed Chair Powell will want to keep options open regarding the policy outlook, still clouded by what additional tariffs President Trump will impose next month.