President Trump’s reciprocal tariff announcement on Liberation Day, that will lift average US tariff rates back to pre-World War I levels, was much worse than anticipated, rocking financial markets. US assets have underperformed, with a near 4% plunge in the S&P500 matched with a significant fall in the USD. The Treasuries curve steepened, with short rates falling more than long rates and the 10-year taking a peek just under 4%. Oil prices have plunged 7%. The NZD blasted up through 0.58.
In President Trump’s sweeping new reciprocal tariff plan, the US will impose an additional baseline 10% tariff on just over two-thirds of countries around the world, and much higher rates for those nations against which the US runs a higher trade deficit. It has been clarified that the reciprocal tariff rate to be used was based on a simple formula relating to the existing US trade deficit relative to imports into the US from a country. Reciprocal tariff rates include the EU at 20%, Japan at 24% and China at 34%. The tariffs take effect 5 April for the 10% baseline nations and 9 April for the more targeted countries. Canada and Mexico were excluded from the reciprocal tariff regime and the pre-existing tariff arrangement applies for now.
For China, it’s even worse, as the extra 34% is in addition to the extra 20% imposed February and March. Adding in the prevailing tariff rate before Trump was re-elected, China will face an average tariff rate above 70%. Under the new regime, developing countries are the worst hit with Vietnam, for example, facing a 46% tariff. South-East Asia, a key trading region for NZ, is a particular target in Trump’s sights. China’s prevailing tactic of re-routing trade via Vietnam and other nations will be severely curtailed.
As we noted yesterday, the uncertainty on tariffs will linger for some time yet. Some countries like NZ and Australia have indicated they won’t retaliate. Carney said Canada will match US tariffs on autos, but this won’t apply to auto parts. EU members met and will meet again next week to discuss countermeasures to be imposed “if negotiations fail”. France’s Macron has been outspoken, suggesting the EU may retaliate with taxes on US technology companies and urging companies to pause investments in the US. China’s Ministry of Commerce released a statement vowing to take countermeasures.
Trump will likely look unfavourably on any countries that retaliate and impose even larger tariffs, and this warning was provided in the signed executive order. On the other side, countries might also be able to negotiate the punitive tariffs down if they concede to some of Trump’s demands.
The reciprocal tariffs policy is being implemented under guise of a national emergency, which makes its legal underpinnings dubious, given it applies to all countries. A successful legal challenge could delay or curb the tariffs. In a symbolic vote, yesterday the US Senate rejected the “emergency” tariffs imposed on Canada last month, with four Republicans crossing the floor in the 51-48 vote.
Future tariff announcements will include product-specific tariffs on pharmaceuticals, semi-conductors, copper and lumber.
In terms of the market reaction, S&P futures plunged as soon as Asia opened and losses extended a little overnight. The S&P500 is currently down about 4%, with economically sensitive sector and IT the worst performing. Of the magnificent seven, Apple has been the hardest hit, down over 8%, reflecting its high China manufacturing base. Key markets elsewhere have fared better, with the Euro Stoxx 600 index down 2.6%, the UK FTSE100 down 1.6%, and Japan’s Nikkei down 2.8%. Remarkably, the NZX50 index closed up 0.15% reflecting its large weighting towards defensive stocks.
In the rates market, the US 2-year rate is down 15bps to 3.71% and the 10-year rate is down 10bps to 4.03%, with an overnight low just below 4%. The market priced in more chance of the Fed cutting rates, with 90bps priced for this year now, or more chance of four rather than three cuts for 2025 – the Fed being seen to respond to the heightened risk of recession and rising unemployment and looking through the likely spike up in US inflation. Data for the week ending 22 March showed US continuing claims rising to over 1.9m, their highest level since 2021 and we’re only in the first innings of the tariff shock. The ISM services index fell more than expected to 50.8 with, notably, a 7.7pt plunge in the employment index to 46.2. Of some relief, the prices paid index fell 1.7pts to 60.9, against expectations of a small lift.
In rates markets outside the US, European 10-year rates fell in the order of 5-7bps while the UK 10-year rate fell 12bps.
In currency markets, the USD has been whacked, with the various USD indices down 1.5-1.6%. That reflects the usual USD safe-haven characteristics being swamped by fears about the US growth outlook. There is also chatter about reserve diversification out of the USD in a world where global trade is routed away from the US. The ultimate safe-haven currencies, JPY and CHF, have outperformed, with gains of 2.5-2.8% since this time yesterday. EUR and CAD are also in the top half of the leaderboard. The AUD has underperformed, up “only” 0.8% from this time yesterday to 0.6345. GBP has also been a laggard. The NZD is up 1.2% to just over 0.58, after meeting some resistance overnight at a new 2025 high just over 0.5850.
On the crosses, NZD/AUD is up to 0.9150 and NZD/GBP is up to 0.4430. The NZD is down on the other key crosses, with NZD/JPY below 85 and NZD/EUR at 0.5260, holding up above the five-year low seen in March.
China retained support for the yuan in its daily fixing as it has done so all year. China is likely to play with a straight bat pending trade negotiations. How China reacts will be a key determinant for the path of the NZD over coming months. Any attempt to allow the yuan to depreciate towards 8 on USD/CNY would likely spill over into a weaker NZD.
Oil prices have been whacked in the order of 7%, a considerable move in the face of a weaker USD to boot, on the back of global growth fears because of the wide-ranging tariffs and OPEC+ saying they would add more than 400,000 barrels of daily output to the market next month, a much greater ramp-up in production than expected. Brent crude is trading just over USD70, near the bottom end of its trading range of the past six months.
In the domestic rates market, yields were pulled down as US Treasuries rallied during the NZ trading session, with NZGB rates closing down 7-11bps across the curve. Swaps were down 6-10bps, with a flattening bias.
There was little change to OIS pricing – a 25bps RBNZ rate cut next week still seen as a given, with another one or two cuts in the mix as well – with the market unwilling to jump to conclusions about the RBNZ’s reaction to developments. The direct tariff hit to NZ exports for the new US tariffs isn’t large, about 0.2% of GDP, but the indirect effects could easily swamp that, given NZ’s strong trade links to Asia. There’s also the risk that US tariffs and the ongoing uncertainty around them tip the US economy into recession. While US inflation will clearly surge ahead, a dumping of goods around the world that were previously destined to the US could result in lower NZ imported inflation. How the NZD ultimately reacts if China devalues and if world economic growth slows are also factors to consider. There is also talk of China finally ramping up policies to support domestic demand. With many moving parts and trade negotiations still to navigate, the lack of market reaction seemed appropriate.
In the day ahead the market will still be trying to work through the implications of Trump’s tariff war. On the economic calendar tonight, focus will be on the US employment report, where the market expects non-farm payrolls to be up 140k in March, with the unemployment rate unchanged at 4.1% and steady average hourly earnings of 0.3% m/m and 4.0% y/y. Fed Chair Powell speaks on the economic outlook and Canada’s employment report is also released.
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