Tariffs & Eggs Whisk An Inflation Frenzy
Hello and welcome to a new week. You may not be shocked to read that the next five days will be piloted but what guided the last five; tariffs and inflation. Sometimes a new economic term or phrase will stick and make its way into every other piece of market analysis. The likes of ‘quantitative easing’, ‘contagion’ and ‘stagflation’ will be remembered post the global financial crisis of 2008 but President Trumps return will now firmly establish the word ‘tariff’ as an economic buzzword (with consequences) in 2025. Rumours swirling on Friday afternoon bought more drama to the tariff saga, but more on that shortly.We’ll begin by focusing on Friday’s data, which was significant for markets, the dollar, the Fed and President Trump.
A mixed but overall sturdy US jobs report delivered more of the same ‘goldilocks’ scenario for the US in which the jobs market held firm with marginal inflationary pressure on wages. However later in the afternoon the distant buzzing of inflationary risks across the pond, which investors have been swatting away until now, stung markets upon the University of Michigan release. Like so often in recent years, the look forward survey data caught the markets attention with one year inflation expectations exploding to 4.3%. Tariffs would undoubtedly have been a key influence but for us Brits that haven’t been Stateside you may also be surprised to read that the price of eggs has soared post the bird flu outbreak, leaving shelves empty and consumers egg-specting higher prices (sorry, couldn’t resist).
So, what’s the significance? We know that tariffs carry risks of not only denting US and global growth but being inflationary.
If such economic trends emerge the Fed will be caught in a tricky spot and could hold at current interest rates for a much longer period if economic growth can withstand it. Something that the President will certainly have something to say about.
Support for the dollar snowballed throughout Friday afternoon and at one point looked like it could avalanche as rumours broke from Reuters that Trump was due to announce ‘reciprocal’ tariffs. The definition of reciprocal could be broad here but much of the chatter centred around the EU and the temperature of the tariff debate has risen again. Overnight it was largely confirmed that the US would impose universal tariffs on Aluminium and Steel (25%).
The delays on Mexico and Canada offered some respite but this is Donald J. Trump, it’s not supposed to be straightforward and last night’s news will be deflating for those countries bordering the US as both big exporters of the two commodities being levied.
Fed holding rates higher and seemingly more to come on Tariffs leaves many expecting the dollar strength to remain with calls of parity emerging in EURUSD in the short term. Notably, post last nights announcements on universal tariffs, market reaction has been relatively subdued in the Asian session but it’s very early on and remember Trump is poised to announce more.
The week ahead will pick up where last week finished. Not typically closely watched but today’s New York Fed Inflation Expectations data will demand attention, whilst US CPI on Wednesday takes way more prominence than it would have post Friday. Chair Powell will warm the audience up for this on Tuesday with him due to deliver a speech. Another central banker that could sell tickets from market participants is Bank of England MPC Member, Catherine Mann, who shocked markets last week by voting for a 50 basis point cut in UK interest rates. She’s due to speak on Tuesday, as is Governor Bailey.
Domestically, growth figures due for release on Thursday will be crucial for GBP and the current Chancellor, with pressure mounting as the country hangs on the precipice of negative growth which would have huge political ramifications for Reeves and Labour.
The week closes out with a string of regional inflation figures and growth figures from the Eurozone. With so much pivotal data and as ever these days Mr Trump never too far away from his next Oval Office headline bingo (watch out this week for a potential announcement on Ukraine) we have a feeling his comments, the US inflation picture and the economic growth outlook from Europe could set the trend for the rest of Q1 in currency markets.
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GBPEUR 1.2024
EURUSD 1.0313
Brent Crude 75.12
Bitcoin $97,865.00
FTSE 8700
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