Market Brief: Price Action Eases As Data Deluge Slows

Price action in financial markets looks remarkably muted this morning as shell-shocked investors stay sidelined against a quiet data backdrop. The dollar is inching higher amid thin trading volumes, most major pairs are within 0.2 percentage points of yesterday’s close, the benchmark ten-year Treasury yield is less than a basis point higher, and North American equity markets are setting up for a modestly-positive open.

Currency traders yawned when Donald Trump issued a new round of tariff threats last night, this time promising to hit automotive imports, pharmaceuticals, and semiconductors with taxes “in the neighbourhood” of 25 percent. “It’ll go very substantially higher over the course of the year,” Trump said, giving businesses “a little bit of a chance” to relocate manufacturing facilities to the US, before adding that he would “probably” provide further details on April 2. After initially-negative market responses, previously-announced measures on Canada, Mexico, Colombia, and China have been slow-walked, delayed, or reversed in recent weeks, triggering rapid currency unwinds and squeezing hyperreactive speculators out of their trades.

The euro exhibited no discernible reaction when Trump turned his focus toward cross-Atlantic trade imbalances. “The EU has been very unfair to us,” Trump said. “They don’t take our cars, they don’t take our farmed products, they don’t take almost anything, they take very little. And we’re going to have to straighten that out”.

The common currency is up almost 1 percent on a year-to-date basis as investors bet on a peace dividend arising from a potential ceasefire in Ukraine, position ahead of an expected increase in defence spending, and move to anticipate a more growth-positive policy mix from the German government after this weekend’s elections. Economic surprise indices—which measure the difference between forecasts and realised data—have turned decisively in the euro’s favour in recent weeks, suggesting that we may be seeing a repeat of last year’s trading dynamic play out, with excessively-low expectations setting the stage for a period of outperformance against the dollar.

A hotter-than-anticipated inflation report failed to elicit a response from the British pound this morning, given that the Bank of England Governor downplayed the likely impact on monetary policy settings. Headline prices climbed 3 percent in the year to January, accelerating from 2.5 percent in December and topping forecasts for a 2.8-percent print on a tax-driven jump in private school fees*, unexpected resilience in airfare costs, and a rise in food and beverage prices. Andrew Bailey called this a “short-run hump,” outlining the need for a “cautious” approach, and highlighting persistent weakness in the economy as one of the most significant factors motivating the central bank’s easing efforts.

Ahead today: minutes taken during the Federal Reserve’s January meeting will be examined for hints as to how officials see the incoming administration’s policy changes impacting inflation and interest rates—but we suspect that the document will be fairly anodyne, with the consensus favouring an extended hold as the rate-setting committee avoids reacting to headlines, and instead waits to see how the economy evolves. We will be interested, nonetheless, in understanding why the central bank removed a line from the statement that previously acknowledged making “progress” toward the 2-percent inflation goal. Chair Powell suggested that this was “not meant to send a signal,” but we know that policymakers make such changes very carefully, and imagine that the modification was, indeed, intended to indicate an erosion in confidence on the inflation trajectory.

On a slightly-digressive note: I was working through historical data on US fiscal revenues and expenses over the weekend, and found that the world that Donald Trump and some of his allies describe—in which tariffs can replace income taxes in funding the government—truly doesn’t exist any more. The state shelled out less than 3 percent of gross domestic product when William McKinley occupied the Oval Office, but now spends more than 23 percent, with the vast bulk of its outlays going on categories—like defence, healthcare, and Social Security—that the current president has promised not to touch. Even if taxes on imports were raised to 100 percent (while implausibly leaving purchasing patterns intact and keeping growth levels stable**), more than half of government funding would still need to come from elsewhere.

*We’re not sure why private school fees are included in a consumption basket intended to capture typical household spending. But with services costs rising, we can see how places like the Hogwarts School of Witchcraft and Wizardry are becoming more expensive.

**Economists use the Latin term "ceteris paribus," or "holding everything else constant" as shorthand for this kind of magical assumption. So how many economists does it take to change a light bulb? Ten - one to screw it in, and nine to keep everything else ceteris paribus.

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