Fresh Trade Uncertainty

MACRO FRAME

December’s 0.4% monthly core PCE print highlights that price pressures remain sticky on a near-term basis, reinforcing the case for a patient Federal Reserve, while uncertainty over US trade policy is likely to cloud certainty for US business and weigh on sentiment.

STOCK INDEX FUTURES

Equity index futures are lower as renewed uncertainty surrounding US trade policy prompted investors to trim exposure to risk assets. Contracts on the S&P 500 and Dow are down 0.4%, while Nasdaq futures are off 0.6%. The weakness follows President Trump’s decision to impose 15% tariffs under Section 122 emergency powers, following Friday’s SCOTUS ruling, raising fresh questions about how the measures will interact with existing trade agreements and potential refunds.

On the corporate front, Gilead slipped 1.5% after agreeing to acquire Arcellx for $7.8 billion, while Nvidia edged lower ahead of its earnings release later this week. Asset managers with exposure to private credit also declined, extending recent losses after Blue Owl blocked redemptions in one of its funds, heightening concerns around liquidity in the space.

Watch point: With existing trade deals in limbo and recent data supporting a pause from the Fed until the summer, focus will center around the Trump administration’s response to last week’s tariff ruling.

CURRENCY FUTURES

US DOLLAR: The USD Index is little changed to start the week after initially falling in response to the Supreme Court’s ruling against President Trump’s IEEPA tariff measures, a decision that raised questions about the administration’s trade strategy. The dollar’s early pullback reflected reduced tariff leverage and uncertainty around the scope of future policy actions, though the administration subsequently announced a 15% blanket tariff on imports. Renewed military tensions between the US and Iran have added another layer of geopolitical uncertainty, supporting defensive positioning across markets.

From a macro standpoint, resilient domestic demand and persistent services inflation continue to provide modest support to the dollar, though tariff-related uncertainty is likely to provide headwinds. With markets still pricing easing later in the year rather than imminently, DXY is likely to remain rangebound.

Watch point: Clarity on the scope and durability of new US tariff measures will be critical, as sustained trade escalation could reintroduce scrutiny regarding dollar safe-haven demand, as policy confusion is likely to remain.

EURO: The euro is little changed against the dollar amid renewed uncertainty surrounding US trade policy. Over the weekend, President Trump announced a temporary tariff on imports from 10% to 15%, after the Supreme Court blocked broader tariff measures on Friday. EU Trade Commissioner Maroš Šefčovič met with US Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick as Brussels seeks clarity on Washington’s intentions, while a senior EU lawmaker urged delaying a parliamentary vote on implementing the bloc’s side of the agreement.

Offsetting some trade-related caution, German business sentiment improved, with the Ifo index reaching a six-month high, suggesting tentative stabilization in the region’s largest economy. Attention now turns to inflation data from Germany, France, and Spain later this week, which will be closely watched for signals on how recent euro strength may be feeding into price dynamics and shaping the European Central Bank’s policy outlook.

Watch point: Upcoming euro-area inflation data is likely to reinforce the ECB’s patient stance, while any upside surprise may revive rate-differential support for the dollar and pressure EUR/USD lower.

BRITISH POUND: The Sterling is little changed against the dollar at $1.3491 as traders digest the fallout from the SCOTUS decision on Friday. Investors modestly increased rate-cut expectations despite strong January retail sales and firm February PMI data. Labor last week continued to reflect gradually softening conditions, with the unemployment rate rising to 5.2% in Q4, its highest level outside the pandemic since 2015, while wage growth continued to cool. Flash PMI data pointed to improving activity, with the UK S&P Global Composite PMI rising to 53.9 from 53.7, above expectations. However, employment continued to decline as firms cited rising labor costs, as output price inflation accelerated to a ten-month high, reflecting higher wage and commodity expenses.

Markets currently price roughly a 75% probability of a 25 bps cut at the March meeting and roughly 50 bps of easing by year-end.

Watch point: A March rate cut is increasingly in consideration given disinflationary trends, though still-firm services inflation could present a hurdle to further easing.

JAPANESE YEN: The yen strengthened against the dollar to 154.57 amid tariff related uncertainty, while trading volumes are expected to be light during a public holiday in Japan. Recent domestic inflation figures showed price pressures eased to their lowest level since March 2022. Annual inflation slowed to 1.5% in January from 2.1% in December, as food inflation declined to a 15-month low, driven in part by a moderation in rice prices. The outcome was broadly in line with Bank of Japan projections that inflation would temporarily dip below its 2% target.

Money markets continue to price a potential rate hike by June, with the January inflation report having only a muted impact on expectations. However, a sustained slowdown in food-price growth could push back the timing of further policy normalization if broader price momentum weakens.

Watch point: Improving sentiment toward Japan’s growth outlook should lend near-term support to the yen, though concerns over expanded fiscal spending may act as a headwind to further appreciation.

AUSTRALIAN DOLLAR: The Aussie is weaker, but held above $0.70 as risk sentiment remain subdued amid the fallout over the SCOTUS decision on Friday. Focus for AUD will be on January’s CPI report due Wednesday, after stronger-than-expected labor data last week lifted market pricing for another Reserve Bank of Australia rate hike in May to around 70%.

Consensus forecasts point to a 0.3% monthly rise in the trimmed mean measure of inflation, which would leave the annual rate steady at 3.3%, still above the RBA’s 2%–3% target band. A firm print would reinforce concerns that underlying price pressures remain persistent, strengthening the case for further policy tightening.

RBA Governor Michele Bullock is scheduled to speak in Melbourne shortly after the release, and any hawkish commentary that validates elevated inflation risks could further support the Australian dollar.

Money markets currently price roughly a 76% probability of a 25 bps rate hike in May, while June and August are favorable to a hike. The combination of resilient labor conditions and still-elevated price pressures keeps the Reserve Bank of Australia biased toward further tightening despite signs of moderating activity.

Watch point: Evidence of sustained moderation in core inflation or a clearer slowdown in household demand would likely temper tightening expectations, while continued strength in price and spending data could keep policy bias firm.

INTEREST RATE MARKET FUTURES

Treasury yields are lower, reversing Friday’s moves, with the 10-year slipping back below 4.06% as renewed uncertainty over US trade policy drove safe-haven demand. Market concerns are centered around the prospect that that existing trade agreements could face renewed strain, even as senior US officials sought to reassure markets that current deals remain intact.

Uncertainty over the administration’s next steps has clouded the outlook, dampening risk sentiment and supporting bonds. Attention now turns to durable goods and factory orders data for further insight into business investment trends and underlying economic momentum.

Fourth-quarter GDP slowed to 1.4% from 4.4% in Q3, largely reflecting weaker government spending and exports, though underlying private demand remained firm with real final sales to private domestic purchasers rising 2.4%. Meanwhile, December core PCE increased 0.4% on the month, holding at 3.0% year-over-year, underscoring persistent services inflation that remains above the Fed’s 2% target.

Together, the combination of steady domestic demand and sticky core price pressures reinforces expectations that the Fed will remain patient, keeping rates steady into the summer while awaiting clearer evidence of sustained disinflation.

Market-priced odds remain favorable to a cut July, with markets pricing 56 bps of total easing by year-end.

Watch point: With labor data pointing to continued stability and inflation remaining sticky, even as the year-over-year pace eased slightly, a summer rate cut remains the base case rather than an imminent move.

The spread between the two- and 10-year yields is 58.40 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.476%.

 

 

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