Trump levies tariffs against Canada, Mexico and China

US President Donald Trump has signed an executive order that will impose tariffs of 25% on imports from Canada and Mexico and a 10% tariff on imports from China in addition to existing tariffs on Chinese imports. Energy imports from Canada will face a tariff of 10%. The tariffs are due to take effect from Tuesday this week. Canada has retaliated by imposing its own tariffs of 25% on goods worth USD 107bn, with an initial section of goods coming under those duties on February 4 and the remainder being hit three weeks later. Both the Mexican president and China’s foreign ministry have indicated that their countries will take retaliatory action, although no details on the nature of those measures have yet been released.

Headline US PCE inflation rose 0.3% m/m in December, leaving the annual measure at 2.6%, up from 2.4% y/y in November. The pace of change in core PCE remained at 2.8% y/y for a third consecutive month, matching consensus expectations. Separately, data suggested that nominal spending by US consumers remained robust in December, gaining 0.7% m/m, rising from the upwardly revised 0.6% m/m growth seen in November. Income growth was in contrast more muted, gaining 0.4% m/m in nominal terms and just 0.1% m/m in real terms. Some of the spending growth was driven by consumers dipping into savings, with the savings rate falling to its lowest level in two years at 3.8%, as consumers bought items ahead of the introduction of tariffs.

Headline French harmonized CPI remained steady at 1.8% y/y in January, slightly below consensus expectations for a rise to 1.9%, despite a sharp rise in energy inflation. French service inflation fell to 1.9% y/y in January, from 2.2% the month prior. In contrast, German harmonized CPI rose 2.8% y/y in January, unchanged from December.

China’s Caixin manufacturing PMI fell to a value of 50.1 in January, with the measure remaining only marginally above the neutral-50 mark separating expansion from contraction. This is the second consecutive fall in the measure of private sector manufacturing activity. The print was well below the consensus expectation for a reading of 50.6 and lower than the 50.5 recorded in December.

Provisions made in India’s latest budget will provide significant tax cuts to middleclass households, with relief worth USD 11.5bn. The cuts are intended to support domestic spending as the country faces global headwinds in 2025.

Petrol prices in the UAE will be higher in February, after remaining unchanged in January from the prices set in December. 95-octane petrol prices are 5.2% higher month-on-month, rising to AED 2.63/l. On an annual basis however, petrol prices remain 4.7% lower than the same time last year.

Today’s Economic Data and Events

• 11:00 TU CPI Jan: forecast 41.15% y/y
• 14:00 EC CPI Jan: forecast 2.5% y/y
• 19:00 US ISM manufacturing index Jan: forecast 49.3

Fixed Income

• Moves in US Treasury markets were mixed on Friday, as investors waited for news of tariffs being imposed on Canada, Mexico and China. The 2yr UST yield fell 1bps on the day to close at 4.1971%, leaving the yield 6bps lower on a week-on-week basis. The 10yr UST yield rose 2bps on Friday, to reach 4.5389%, but remained 8bps weaker compared to a week earlier.
• European bond yields were generally lower on Friday. The 10yr Gilt yield fell 2.3bps to reach 4.536%, while the 10yr Bund declined by 6bps to 2.456%.

FX

• The US dollar spot index gained 0.5% on Friday on the back of reports confirming Trumps tariff plans. EURUSD fell 0.28% to 1.0362 and GBPUSD was lower by 0.19% at 1.2395, while USDJPY rose 0.58% to 155.19.
• Moves in commodity currencies were mixed on Friday. USDCAD rose by 0.38% to 1.4541 ahead of the official White House announcement of tariffs being imposed on Canadian exports to the US. AUDUSD gained 0.15% to 0.6218 while NZDUSD was largely unchanged at 0.5634.

Equities

• US equity markets closed weaker on Friday on reports that President Trump planned to go ahead with the imposition of Tariffs against Canada, Mexico and China. The Dow Jones fell 0.75% on the day, to leave the index just 0.28% higher on a week-on-week basis. The S&P 500 and NASDAQ declined both on the day (0.5% and 0.3% on Friday, respectively), as well as compared to a week ago, dropping 1% and 1.64% respectively.
• European markets, in contrast, rose on Friday driven by solid earnings reports and speculation that the EU would be saved from initial rounds of US tariffs. The FTSE 100 gained 0.3%, the CAC 40 rose by 0.11% and the Eurostoxx increased by 0.1%.
• Local markets were mixed on Friday. The DFMGI added 0.5% while the ADX declined by 0.02%.

Commodities

• Oil prices saw marginal falls on Friday, with Brent futures down 0.14% at USD 76.76/b and WTI 0.27% lower at USD 72.53/b.