More good cop, bad cop this weekend

Markets

The US dollar was last week’s latest victim of Trump’s improvised trade strategy. EUR/USD closed the week at 1.1355, up from 1.0882 at the start of the week and taking out the 1.1214/74/76 resistance zone in the process. From a technical point of view, we target full retracement to the 2023-top at 1.2349 in the medium term. US recession risks are growing with the left side of the “dollar smile” numbed by a general loss in confidence in the US (government), its hawkish trade policy and its deteriorating public finances. The US yield curve bear steepened last week with weekly changed ranging from +30.8 bps (2-yr) to +50.2 bps (20-yr). The US 30-yr yield tested the psychological 5% mark. The risk of an uncontrolled sell-off at the long end of the curve remains, even as it didn’t materialize last Friday in the wake of the April Michigan consumer confidence survey. It showed both short-term (1-yr) and long term (5-10-yr) inflation expectations extending their recent steep climb. The 1-yr gauge rose from 5% to 6.7% (vs 5.2% expected). It’s the highest level since 1981, easily surpassing the post-Covid peak of 5.4% (March 2022). The long-term measure rose to 4.4% from 4.1% (vs 4.3% expected & highest since 1991). Boston Fed Collins in an interview with the Financial Times stressed that the Fed would absolutely be prepared to help stabilize financial markets if conditions become disorderly. Overall liquidity concerns prompted the Fed for example into action in March 2020. There’s a difference between providing liquidity and interest rate management though, as pointed out by Minneapolis Fed Kashkari over the weekend. He emphasized that the Fed’s job is to keep inflation under control. All the central bank can do is keep inflation expectations under control while investors in the US and around the world are trying to determine what is the new normal in America. “The Fed has zero ability to affect that destination”. He ruled out interest-rate cuts as an insurance policy against an economic slowdown.

More good cop, bad cop this weekend. Late on Friday, US President Trump gave a tariff reprieve to a range of electronics from 125% on China and from the 10% flat rate around the rest of the world. It’s temporary though with Trump on Sunday stressing that the government is taking a look at semiconductors and the whole electronics supply chain. This sectoral action can be expected later this week. It makes us err on the side of caution when it comes to interpreting this morning’s Asian risk relief. At the moment, we stick to our sell-on-upticks approach for US assets (Treasuries, stocks, dollar). Today’s eco calendar is thin with NY Fed (1-yr) inflation expectations and a speech by Fed Waller on the economic outlook being the wildcards.

News and views

EU finance ministers on Saturday discussed and were open to the idea of a joint fund that would buy and own defence equipment. The so-called European Defence Mechanism (EDM) would be an intergovernmental fund with paid-in capital that borrows on capital markets, with its members also including non-EU countries. The latter is considered important because it allows for the involvement of defence (and nuclear) powerhouse UK as well as Norway and Canada. The EDM would be one way to address fiscal sustainability concerns for countries with already high debts that are now facing huge spending investments. Some countries including France, Germany and Belgium said the EU should first look at existing instruments such as the EIB and the ReArm Europe plan. Other officials agreed that the latter should be approved ASAP but suggested that spending beyond that should be developed more along the lines of the EDM.

 UK property website Rightmove said asking prices in the survey period between March 9 and April 5 rose 1.4% month over month (1.3% y/y) in a bigger-than-usual rise for the time of the year. The average asking price hit a new record (£377 182) as a result. Rightmove attributed the uptick to an increased choice bringing more buyers to an already resilient market. But buyers had also been rushing to complete purchases before the end of March, when a temporarily reduced purchase tax would fade out. Rightmove said the impact of the US’ trade policies was not clear yet but it could boost the market if it led the BoE to cut rates faster. Mortgage rates, however, are typically linked to longer-dated yields and those shot up dramatically right after the end of the survey period. The 30-year gilt yield hit the highest level since 1998 by end last week.

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