President Donald Trump has announced plans to levy a 25% tariff on all steel and aluminum imports into the United States. This significant move is expected to impact global trade dynamics and add pressure to financial markets. The announcement comes amid broader economic developments, including rising inflation expectations and fluctuating currency valuations, which have contributed to a complex economic landscape.
The proposed tariffs are part of President Trump's broader strategy to bolster domestic manufacturing by protecting American industries from foreign competition. However, the announcement has already led to increased volatility in financial markets. Equity markets, in particular, have felt the pressure, with higher yields weighing heavily on stocks after the release of the University of Michigan's inflation expectations report.
Meanwhile, currency markets are also reacting to these developments. The GBP/USD currency pair has remained under pressure, trading near 1.2400 during the early European session on Monday. The US Dollar's strength, bolstered by Trump’s tariff threats, has also put pressure on the EUR/USD pair, which remains in the red above 1.0300.
In the money markets, investors are closely watching the Federal Reserve's next moves. Current market expectations fully discount a Fed rate cut in September, with only a 50% probability of a second rate cut priced in for December. The Fed's decisions will likely be influenced by various economic indicators, including inflation data.
Core inflation, excluding food and energy prices, has shown an uptick, rising from 0% year-over-year to 0.6% year-over-year. This increase is largely attributed to a temporary spending surge around the Lunar New Year celebrations, suggesting it may not signal a lasting trend. Services also saw a rise of 1.1% year-over-year.
US Treasury yields have experienced fluctuations, with yields closing between 7.7 basis points (2-year) and 5.6 basis points (30-year) higher recently. However, this morning saw yields little changed, even slightly softer, indicating a degree of market calmness despite the ongoing trade tensions.
Fitch Ratings continues to project a budget deficit forecast of 4.8% of GDP in 2025 and 4.7% in 2026. Meanwhile, rating agencies Moody’s and Standard & Poor’s are set to release their first updates of the year on April 11 and April 25, respectively. These updates will be closely monitored by investors for any changes to the economic outlook or credit ratings.
The US Treasury is poised to conduct its early month auction series for 3-year, 10-year, and 30-year bonds during the week. These auctions are a regular part of the Treasury's debt management strategy and can provide valuable insights into investor sentiment regarding US government debt.
On the employment front, recent data showed a decline in the unemployment rate from 4.1% to 4.0%, even as the participation rate edged up from 62.5% to 62.6%. Headline US job growth for January was recorded at 143,000 jobs, falling short of the expected 175,000 but accompanied by upward revisions for November and December totaling 100,000 jobs.