US economic data awful - exploding trade deficit adds to Q1 GDP downside risk; weaker consumer confidence and drop in job openings. Some backdown on auto tariffs but China won't "kneel down" on trade war

The “Sell America” trade shows further sign of unwinding. US equities are up for a sixth consecutive day, with the S&P500 showing a current gain of 0.6%, supported by a backdown in auto tariffs. US economic data were awful, supporting a lower rates backdrop. Currency movements have been modest, but the USD is broadly stronger, and the NZD and AUD have underperformed over the past 24 hours.

The White House confirmed recent media reports that President Trump would sign an executive order later today to ease the impact of his auto tariffs, preventing duties on foreign-made vehicles from stacking on top of other levies and lessening charges on parts from overseas used to make vehicles in the US. This follows the recent backdown in tariffs for some electronic goods and U-turns look to be the norm, as the sledgehammer approach to introducing new import tariffs gets refined.

Treasury Secretary Bessent said that the US was speaking to 17 out of 18 important trade partners.  China is the likely omission. How well these trade talks are going is up for debate, but a PBS journalist tweeted that talks are not going well with the EU, according to comments from the US Trade Representative.

Bessent repeated claims that high US tariffs are unsustainable for China, and they need a deal more than the US, but that is wishful thinking.  China is well prepared to go the distance and is unlikely to blink first in the trade war. China’s Foreign Ministry released a social media video, titled “Never Kneel Down!” which is self-explanatory, and the video included the message “Bowing to a bully is like drinking poison to quench thirst”.

US economic data released overnight was awful. The US goods trade balance rose to a record $162b in March, much higher than consensus estimates, driven by a further surge in imports owing to a front-running of activity ahead of new tariffs. Thus, net exports will make a larger negative contribution to Q1 GDP, in data due tonight. The underlying measure of the Atlanta FedNow annualised GDP estimate fell to minus 1.5%.  A likely subsequent plunge in imports for Q2 will have the reverse effect of boosting Q2 GDP.

The Conference Board measure of US consumer confidence plunged 7.9pts to 86.0 in April, below consensus even with a good steer from the University of Michigan measure released earlier.  The fall in the headline measure was led by a 12.5pts fall in the expectations component to 54.4, taking it below the COVID-19 low, consistent with levels normally associated with contraction in real consumer spending and economic recession. Year-ahead inflation expectations rose to a 2½ year high of 7%. Write-in responses revealed that tariffs were now on top of consumers’ minds, with concerns about tariffs increasing prices and having negative impacts on the economy.

The JOLTS report showed a greater than expected fall in US job openings in March, down 288k to 7192k, its lowest level since September. Other measures weren’t as discouraging, with steady hiring, a drop in layoffs and a lift in the quits rate.

The softer economic backdrop supported a further fall in US Treasury yields. The 10-year rate is down for a sixth consecutive day, down 3bps to 4.17%, with a largely parallel move in the curve. Pricing for Fed rate cuts moved towards four full rate cuts this year, with nearly 100bps now priced, with the recession indicators seen to carry more weight than the likely temporary lift in inflation.

Currency movements have been modest, although the USD is broadly stronger for the day and the AUD has been a notable underperformer, falling back below 0.64. The NZD hasn’t been far behind and trades this morning under 0.5950, while NZD/AUD has pushed back up to 0.93. The NZD is modestly weaker on other key crosses. There was little reaction in CAD to Mark Carney’s expected election win, with a narrow majority that will likely require support from other parties to pass legislation once the full vote count is in.

In the domestic rates market, NZGBs underperformed, with rising rates against a relatively flat swap market, due to flow than anything fundamental.  The 10-year NZGB rose 3bps to 4.48% and the ultra-long bonds rose 5-6bps, against a 1bp lift in the 10-year swap rate.

Finance Minister Willis said in a pre-Budget speech that the operating allowance will be cut to $1.3b from $2.4b, amidst a downgrade to growth forecasts. The smaller operating allowance would still allow the figures to show a surplus by FY2029. The IMF’s recent fiscal monitor showed NZ as having one of the highest cyclically-adjusted general government primary fiscal balances in the world, destroying any argument that NZ is going through a period of fiscal austerity.

The economic calendar over the next 24 hours is action-packed, with plenty of top-tier data, including Australia CPI, China PMIs, Euro area GDP and, in the US, GDP, the employment cost index and PCE deflators. Domestically, the ANZ business outlook survey is released.  For US Q1 GDP, the range of economist estimates is minus 2.4% to plus 1.7% with the consensus median at 0.1% on an annualised rate for the quarter, which would be the weakest quarter in three years, ahead of an expected bigger blow to the economy over coming quarters. After last night’s trade figure, the consensus estimate might well be stale, and the odds are likely higher of a negative print.