Trump takes first steps towards implementing reciprocal tariffs

In focus today

In the US, January retail sales and industrial production data will be released. Especially the former will be interesting for the markets given that private consumption remains by far the most important driver of economic growth in the US.

In the euro area, the focus shifts to employment data for 2024 Q4, which we expect to show a 0.1% q/q increase, mainly driven by Spain. It will be interesting to see if employment continued to rise, as the labour market remains crucial for the growth outlook this year.

Economic and market news

What happened yesterday

In the US, like the CPI print, the annual PPI was higher than expected in January, with the final demand excl. food and energy measure coming in at 3.6% y/y (cons: 3.3%). Conversely, the monthly measure was more in line with consensus at 0.3% m/m (cons: 0.3%) relative to the CPI counterpart. Decomposing the details indicates that components such as the financial and healthcare services sectors were to the lower side, which feed into the estimates of the upcoming PCE release, explaining the downtick in yields following the release.

President Trump has started devising plans for the reciprocal tariffs, he mentioned earlier in the week. Though no tariffs have been implemented yet, he signed a memo ordering his team to start calculating duties that match those other countries charge the US and to counteract non-tariff barriers. He also emphasised that tariffs would target countries with high VAT, a move that appears to be aimed at the EU. Trump, who campaigned on a pledge to bring down consumer prices, acknowledged that prices could go up in the short term because of the tariffs. The news triggered risk-on sentiment, resulting in lower US yields, a weaker USD, and higher equities.

In an interview with the Wall Street Journal, Vice President JD Vance mentioned the US could impose sanctions or take military action against Moscow if Russia does not agree to a peace deal ensuring Ukraine's long-term independence. Meanwhile, Trump stated that Ukraine would participate in peace talks with Russia - following Wednesday's opening for such discussions. Attention now turns to this weekend's Munich Security Conference for possible new signals towards ending the war, although Kyiv emphasized it would be premature to speak with Moscow at the conference.

Additionally, Trump said he would "love" to have Russia back in G7 (which would become the G8 with Russia), while also eyeing a summit with Putin and Xi Jinping, during which, among other things, he would propose to discuss cutting the countries' military budgets in half.

In the euro area, industrial production was lower than expected at 1.1% m/m in December (cons: 0.6%), primarily attributing to capital goods, likely reflecting the continued low appetite for investments in the euro area amid low capacity utilization. We expect the weakness in the industry to continue the coming six months before falling interest rates and rising real incomes should help stabilise the manufacturing sector.

In the UK, data showed a stronger than expected GDP growth of 0.1% q/q in Q4 2024 (cons: -0.1%) with December coming in significantly stronger than expected at 0.4% m/m. For December, the topside surprise was broad-based with industrial production, services and manufacturing production offering positive contributions while construction contracted. More broadly, in Q4 private consumption was weaker than expected posing no growth and net exports posed a drag. We expect private consumption to pick up the coming quarters.

In Switzerland, January inflation surprised to the topside in core terms at 0.9% y/y (cons: 0.6%), while headline inflation stood at 0.4% y/y (cons: 0.4%). In their latest set of forecasts from the December meeting, the Swiss National Bank (SNB) forecasted inflation at 0.3% y/y in Q1 2025. We get another inflation print before the next SNB meeting on 20 March.

In Norway, the oil investment survey confirmed our expectations of a gradual slowdown in oil investments during 2025 and a drop next year, which is important as this leaves room for a stimulus to the rate sensitive parts of the economy.

The annual address from Norges Bank's governor Ida Wolden Bache contained no new policy signals. Instead, she reflected on Norway as a small, open economy heavily reliant on trade and stressed the importance of international cooperation and flexible economic policies.

Equities: Risk-on was back in fashion on Thursday. US rebounded, driven by big tech as yields dropped. VIX dropped to 15 as Trump unveiled his reciprocal tariff plans, which is the lowest level in three weeks. Growth cyclicals leading the gains, taking both the S&P 500 and Stoxx 600 up 1.1%. Increased risk appetite still not benefitting small caps which performed in line with markets yesterday. Futures are unchanged this morning.

FI: Global bond yields declined and shrugged off most the rise from Wednesday after the stronger than expected US CPI data. Furthermore, the stronger than expected US PPI data better than expected Jobless Claims did not have much impact on global bond markets. The rally was driven from the long end of the curve and there was a solid bullish flattening.

FX: Big swings in FX as Trump's announcement to impose reciprocal tariffs initially sent EUR/USD below 1.04 before retracing towards session highs as the open-ended tariff process sent US yields lower across the curve. The Sterling found support in stronger-than-expected growth data and the CHF had a strong session on the back of a topside surprise to Swiss inflation. After a brief setback on Wednesday, the SEK had yet another strong run yesterday, with EUR/SEK tracking lower towards 11.20.