You Spin Me Round

February 27, 2025
6 min read

You Spin Me Round

  • Markets fluctuate as US trade tariff uncertainty lingers. USD is up, European equity futures are down, and yield curves across major economies have flattened.
  • Second-tier US economic data and plenty of Fed speakers due today. The ECB Account of the January meeting is the Eurozone highlight.
  • Australia capex unexpectedly shrinks in Q4. But RBA is more focused on labor market development. New Zealand February ANZ business outlook survey was mixed, reinforcing the RBNZ gradual easing guidance.

USD is firmer on US trade tariff uncertainty. Yesterday, US President Donald Trump proposed a vague 25% tariff on the European Union “that will be on cars and all the things.” EUR came under modest downside pressure following the comments. In contrast, CAD and MXN had a kneejerk relief rally after Trump suggested the 25% tariffs on Mexico and Canada, scheduled to take effect on March 4, could be delayed another month.

As my colleague Win noted, delaying tariffs is almost as bad as enacting. By drawing out the uncertainty, firms are left with an uncertain outlook that will likely delay investment and hiring. A rolling one-month threat will just perpetuate this uncertainty which remains a drag for MXN and CAD.

Meanwhile, concerns over the US growth outlook curtails near-term USD upside and supports the recent rally in Treasuries. Tomorrow’s January US PCE data could confirm the poor retail sales print already reported. PCE is a more comprehensive measure of consumer spending as it includes purchases of goods and services and is reported in real terms. Retail sales only tracks nominal spending for goods.

Today, we get the first revision to US Q4 GDP data (1:30pm London). Growth is expected to be unchanged from the preliminary estimate at 2.3% SAAR. Forecasts for Q1 GDP growth are mixed. The Atlanta Fed GDPNow model is tracking at 2.3% SAAR and the New York Fed Nowcast model at 2.9% SAAR. Both models will be updated Friday.

Fed speakers today: Richmond Fed President Tom Barkin (non-FOMC voter), Kansas City Fed President Jeff Schmid (FOMC voter), Fed Vice Chair for Supervision Michael Barr (3:00pm London), Fed Governor Michelle Bowman, Cleveland Fed President Beth Hammack (2026 FOMC voter), and Philadelphia Fed President Patrick Harker (2026 FOMC voter).

EUROZONE

EUR/USD is trading at the lower end of a one week 1.0450-1.0530 range. Futures contracts on European stocks are down. The ECB Account of the January 29-30 meeting is the domestic highlight (12:30pm London). At that meeting, the ECB delivered a widely expected 25bps policy rate cut to 2.75%. ECB President Christine Lagarde confirmed that the decision to ease was unanimous. Lagarde also stressed there were no discussions about where to stop cutting rates and unlike in December, there was no debate “at all” about slashing rates 50bps.

Today’s ECB January money supply data is expected to show that financing conditions are improving but still very weak by historical standards (9:00am London). Broad monetary growth (M3) is expected to rise to 3.8% y/y vs. 3.5% in December, which is well below long term average of 7% y/y.

Bottom line: the ECB has scope to deliver on rate cut expectation. Interest rate futures have fully priced-in 75bps of ECB easing over next 12 months and the policy rate to bottom around 2.00%. The prospect of more ECB easing remains a major headwind for EUR.

AUSTRALIA

AUD/USD is heavy around 0.6300 in line with the correction in iron ore prices. The unexpected contraction in Australia’s private new capital expenditure (capex) over Q4 does not shift the dial on RBA rate cut expectations. Capex fell -0.2% q/q in Q4 (consensus: 0.5%) vs. 1.6% in Q3 (revised up from 1.1%) driven by a decline in equipment, plant and machinery. Encouragingly, the first estimate for planned capex for 2025-26 was up 1.8% to A$148bn on the first estimate for 2024-25.

Regardless, the RBA signaled it will pay particular attention to labor market development to guide future policy decision. Cash rate futures imply 55bps of RBA cuts over the next 12 months that would see the policy rate bottom around 3.50%.

NEW ZEALAND

NZD/USD is down near a one week low as tariff uncertainty weighs on the global growth backdrop. The ANZ February business outlook survey was mixed and supports the RBNZ’s guidance for a more gradual pace of easing. Business confidence rose 4 points to 58.4 in February, while expected own activity eased 0.7 points to +45.1. Reported past activity, which has the best correlation to GDP, fell 3 points to 2.9 indicative of a shacky recovery in economic activity. The RBNZ has penciled-in another 75bps of easing over the next 12 months that would see the policy rate bottom at 3.00%. This seems about right.

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