A Rare Trifecta

The US economy is facing a crisis of confidence. USD is down against most major currencies, US stocks are under renewed downside pressure and Treasuries are selling-off. This rare synchronize selling of US assets reflects the broader unravelling of the trade network and alliances that sustains US financial leadership.

The US so-called reciprocal tariffs kicked-in today, including a whopping 104% levy on all Chinese imports. The total US average tariff rate on Chinese goods is now closer to 125%! China hasn’t announced any retaliatory action to the latest round of tariffs but yesterday the Chinese Ministry of Commerce warned that “China will fight to the end.” The pervasive uncertainty created by the US trade war is a major blow to the global economy and can further weigh on risk assets in the near-term.

Don’t expect the Fed to come to the rescue with an emergency rate cut. This is an entirely policy-driven market meltdown and there is no reason for the Fed to bail out financial markets. In fact, San Francisco Fed President Mary Daly (non-voter) cautioned that “jumping to a conclusion in a period of such uncertainty is a recipe for making a mistake.” Instead, Daily reiterated that “with growth good and policy in a good place, we’ve built the time and the ability to just tread slowly and tread carefully.” Richmond Fed President Tom Barkin speaks later today (non-FOMC voter) (4:00pm London).

Overall, the USD outlook is not looking good for three reasons: (i) The Trump administration implicit support for a weaker dollar, (ii) Heightened risk the US falls into stagflation, (iii) Growing loss of credibility in US policymaking.

The FOMC minutes of the March 18-19 meeting will offer outdated information following the dizzying last few trading days (7:00pm London). At that meeting the Fed kept rates on hold at 4.25-4.50% for the second straight time and this decision was unanimous. The FOMC statement was tweaked to reflect elevated levels of uncertainty. The updated Fed funds rate projections were unchanged, but details were skewed in favor of less easing. The updated economic projections painted an unfavorable picture, with growth forecasts cut and inflation forecasts raised. Finally, the Fed announced it was slowing the unwind in Treasury holdings from April 1. Only Fed Governor Christopher J. Waller voted against this action and preferred to continue the current pace of decline in securities holdings.

NEW ZEALAND

The RBNZ cut the Official Cash Rate (OCR) by 25bps to 3.50% (widely expected) and noted it “has scope to lower the OCR further as appropriate”. The RBNZ warned that “the recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand.”

This suggests the RBNZ may have to slash the OCR towards the lower end of its 2% to 4% neutral range estimate. The swaps market price-in an additional 100bps of rate cuts in the next six months and the OCR to bottom closer to 2.50%.

CHINA

USD/CNH pared back losses after surging to an all-time high at 7.4290 yesterday. The People’s Bank of China (PBOC) is trying to reign-in CNH depreciation by gradually tweaking the USD/CNY fixing. Today, the PBOC set the USD/CNY fixing at 7.2066 slightly above yesterday’s 7.2038 fixing.

The idea that China can weaponize its US$700bn stash of Treasuries in a trade war with the US does not pass the smell test. China holds less than 5% of the total outstanding amount of long-term Treasury securities which is too small to have a meaningful impact on Treasury yields.

JAPAN

USD/JPY is trading heavy near 145.00. Bank of Japan (BOJ) Governor Ueda reiterated the bank’s guidance that it would continue to raise the policy interest rate if the outlook for economic activity and prices will be realized. However, he stressed “we need to be very cautious about growing uncertainty surrounding the future development of trade policies in each country.” The swaps market no longer price-in material odds of additional BOJ rate hikes over the next 12 months. Despite this repricing, JPY continues to gain from save haven flows.

Japan's Ministry of Finance (MOF), Financial Services Agency (FSA), and BOJ are currently holding a meeting to discuss market conditions. Stay tuned…

INDIA

Reserve Bank of India (RBI) delivered on expectations and cut the policy rate 25bps to 6.00%. The decision was unanimous. Moreover, RBI changed the policy stance from neutral to accommodative implying more cuts are in the pipeline. The swaps market is pricing in 50bps of further easing over the next twelve months and the policy rate to bottom around 5.50%.