US moves forward with tariffs

It appears certain that the US is going to impose new tariffs of 25% on all goods from Mexico and Canada from today (excluding Canadian energy which will be charged at 10%), after President Trump said that there was ‘no room left’ for the two countries to avoid their imposition, while an executive order doubling tariffs on Chinese goods to 20% was signed earlier in the day. While there had been some uncertainty about how far the US would go in actually imposing these tariffs on some of its biggest trade partners, the fact that they are now going ahead has sparked fears that it is just the first step and that threatened global reciprocal tariffs and a 25% tariff on the EU will follow. The affected countries are already reportedly considering their own retaliatory tariffs on US goods, prompting concerns that a global trade war will ensue, potentially disrupting the global disinflationary trend and meaning that central banks might have to pause, halt, or even reverse their cutting cycles.

The US ISM manufacturing survey fell to 50.3 in February, down from 50.9 previously and missing the predicted 50.7 with a number of sub-components suggesting that the threat of tariffs is already having an impact on businesses. Employment turned contractionary at 47.6, from 50.3, while new orders also declined, falling to 48.6, down from 55.1. Concerningly for the Fed, the prices paid component of the index ticked up to 62.4, from 54.9 previously and well above the predicted 56.0.

Turkish CPI inflation slowed to 39.1% y/y in February, lower than the predicted 39.9%. This was down from 41.1% in January and marked the ninth straight month where annual inflation has fallen. Prices were 2.3% higher than the previous month, compared with a 5.0% rise in January, while annual core inflation was at 40.2% y/y, down from 42.7% previously. The lower than anticipated inflation print gives the TCMB more room to cut rates at its upcoming rate-setting decision on Thursday, with the consensus prediction pointing to a 250bps reduction to the benchmark one-week repo rate, which would take it down to 42.5%.

In Bahrain, CPI inflation stood at 0.0% y/y in January, down from 0.5% in December, with food and non-alcoholic beverages down 1.6% y/y. Prices were 0.1% higher than the previous month.

Eurozone inflation came in a little hotter than predicted at 2.4% y/y, down from 2.5% in January but higher than the predicted 2.3%. Prices were 0.5% higher than in January. Core inflation fell to 2.6% y/y, from 2.7% the previous month while services inflation slowed to 3.7% in reassuring news for the ECB. The bank is making its rate-setting decision on Thursday with a 25bps cut to 2.50% for the benchmark rate widely expected.

Today’s Economic Data and Events

08:30 Saudi Arabia Riyad Bank PMI survey

09:15 Egypt S&P Global PMI survey

Fixed Income

• The rally in USTs continued as yields on the 2yr fell for the seventh straight session as concerns around US growth amplified, falling 4bps yesterday to 3.9496%. The 10yr yield dropped 2bps to 4.1400%.
• Yields on European treasuries sold off yesterday by contrast on expectations of a ramp-up in borrowing to fund proposed defence spending surgest. The 10yr bund yield rose 8bps to 2.490%.
• The government of Ras al Khaimah mandated banks to arrange virtual investor calls as it looks to issue a 10yr USD-denominated sukuk.

FX

• The dollar index closed down 0.8% yesterday as bond yields fell and political noise around perceived currency manipulation heightened.
• The gains against the dollar were broad-based, with the EUR closing up 1.1% as bond yields surged, rising to 1.0487. GBP added 1.0% to 1.2701, while JPY closed at 149.50, a gain of 0.8% against the greenback.

Equities

• US equity markets sold off sharply yesterday amid weak monthly data and the threat of a looming trade war. The NASDAQ led the losses as it fell 2.6%, lagged by the S&P 500 (1.8%) and the Dow Jones (1.5%).
• There were robust gains in Europe by contrast as defence stocks surged. The CAC closed up 1.1% and the DAX 2.6%.
• Locally, the DFM gained 0.2% and the ADX closed 0.1% lower. Saudi Arabia’s Tadawul ended the day up 0.7%.

Commodities

• OPEC+ has made a surprise announcement that it will bring 138,000 b/d back onto the market in April as planned, rather than pushing back the increase once again.
• The announcement weighed heavily on oil prices, with both benchmarks closing down sharply. Brent futures dropped 2.1% to USD 71/6/b while WTI fell 2.0% to USD 68.4/b.