New week, new threats

Another week starts with tariff threats. This time, everyone that applies tariffs to the US will be hit back with the same tariffs, and all aluminium and steel imports to the US – no matter from whom – will face a 25% tariff. ;ood this Monday in Asia is pretty mixed – to say the least. Aluminum and iron ore futures are slightly down, the US dollar index is up and the commodity currencies like Aussie and Loonie opened the week with a gap but the AUDUSD recovered early losses. The swift recovery in Aussie was certainly due to the encouraging Chinese data that showed that inflation advanced to the highest level in five months thanks to increased spending during the Chinese New Year holiday. Australian equities are not particularly welcoming the fresh tariff news, while FTSE  futures are slightly up. The rebound in oil prices on fresh US sanctions on Iranian crude exports and encouraging Chinese inflation data help counterweigh the negative impact of softer metal prices. As per oil, good news from China could throw a solid floor under the US crude selloff after the price of a barrel approached the $70pb psychological level last week and rebounded from there.

Anti-goldilocks

Friday’s jobs data from the US was all but ideal for the so-called goldilocks scenario. The US posted slower-than-expected nonfarm payrolls and acceleration in wages growth in January. The annual revision to the nonfarm employment on the other hand was just less than 600K jobs – as expected. The combination of slower job additions with higher wages didn’t enchant the Federal Reserve (Fed) doves. The US 2-year yield jumped to flirt with the 4.30% mark as the 10-year yield advanced past the 4.50% level. Plus, the share of foreign-born workers in the US kept climbing last year but these jobs are at risk under Trump administration.

Plus, the latest data from the Fed on Friday showed alarming rise in household debt, credit card delinquencies remain strong. As such, it’s hard to guess what’s the best thing to do for the Fed. All eyes will be on Fed Chair Jerome Powell’s semi-annual testimony on Tuesday and Wednesday. For now, the Fed is expected to keep the rates unchanged at least until June – and a June rate cut is a coin toss.

Overall, US’ exceptional growth story is based on exploding private and public debt. Trump’s plans for mass deportation and sizeable tariffs hint at uptick in US inflation in the coming months. Not helping are the California wildfires that are expected to cause a jump in new and used car prices, and the bird flu which is sending egg prices soaring. As a result, a stronger-than-expected set of inflation data this week – and/or a cautious stance from Powell should keep the US dollar in demand and weigh on risk appetite.

Speaking of appetite

Equity indices didn’t like the anti-goldilocks jobs report last Friday. The S&P500 retreated 0.95% while Nasdaq 100 fell 1.30%. Magnificent 7 earnings were robust but not ‘magnificent’ with slowing growth / high AI spending. Mag7 ETF slid 2% on Friday and 2.41% throughout the week.

In Europe, Friday saw the European Stoxx 600 give back some gains too. On the data front, Germany posted a record trade surplus with the US. The timing is bad, as Trump is out and pointing his finger to Europe, as well. Consequently, the tariff threats remain on the back of investors’ minds in Europe and Germany will be on the front line of a potential transatlantic trade war. But that worry is not dominating the price action so far. On the contrary, the convergence trade between Europe and the US remains in full play. The S&P500 is up by a meagre 2% since the year started while the Stoxx 600 was up by almost 7% on Friday’s close. The divergence between the Fed and European Central Bank (ECB) expectations remains supportive of the convergence trade, but doesn’t change the fact that the European companies’ face dull economic outlook and instable political landscape. The EURUSD was aggressively sold on Friday and again at the Asian open. Losses have been mostly reversed at the time of recording but the EURUSD outlook remains negative on the back of diverging Fed / ECB policy outlooks and strong resistance is seen into the 50-DMA, a touch higher than the 1.04 psychological mark.