US Politics – Trump gets serious
Over the weekend, Trump used National Emergency powers to announce 25% tariffs on Mexico/Canada and 10% on top of existing China levels, effective February 4th. The announcement is on the aggressive end of expectations given the quick implementation and the scope covering 44% of US imports. For the US economy, previous Fed models used during Trumps first term suggest a -1.2% hit to GDP, and a +0.7% rise in core PCE inflation. Outside the US, the impact is likely to be materially disruptive too, and Canada has already announced reciprocal tariffs of 25% on $155bn of US goods. Mexico and China announced retaliation but without details yet. It will be difficult to negotiate given the short timeline, so the chance the tariffs come is high and show Trump is serious about his threats.
The market reaction was material, with the US-Dollar rising 1.1%, especially versus CAD (+1.3%), MXN (+2.3%) and the EUR (EURUSD -1.3%). S&P500 futures fell 2%, while EUR HY spreads opened 10 basis points wider. US interest rates twist-flattened, whereby 2y Treasuries yields rose 7 basis points upon higher inflation expectations, but 30Y Treasuries fell -1 basis points.
US Economics – Stable Labour Markets
Friday’s NFP release is expected to show 170k job growth, in line with recent trend growth and showing no material sign of weakness. The unemployment rate is seen stable at 4.1%, and average hourly earnings are expected to fall from 3.9% to 3.8%. Los Angeles wildfires add downside risk to employment figures this month, with estimates around -20/-30k jobs. Earlier in the week, ISM manufacturing and services surveys will offer further insights into the sentiment of labour markets. The true challenge however lies further ahead, as Trump deportation orders will tighten the labour market materially, especially in manufacturing sectors.
Central Banks – Wait and see what Trump does
The Fed held rates as expected at 4.25-4.5% last Wednesday, amid policy uncertainty under Trump. The statement featured slight changes showing unemployment rates stabilized and removed language around “progress” towards the 2% inflation goal, but Powell clarified these changes carried no policy significance. The Fed remains at the mercy of Trump policy, and with rising inflation expectations post Trump tariffs, US short-term rates price only 37 basis points of rate cuts by year-end.
The ECB lowered rates by 0.25% to 2.75% as expected last Thursday. Monetary policy is still restrictive in the Eurozone, but amid inflation progress can be lowered further with the council eyeing 2% terminal. Lagarde announced a new policy study on neutral rates to be released this week, which we’ll watch closely to determine the landing zone for ECB rates this cycle. Economists take different views if the ECB should only lower rates to neutral or go beyond into easing territory (e.g. 1.5%) amid Trump tariffs and a slowing economy.
Algebris Investments’ Global Credit Team
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