GGMA Morning Brief: Trump’s tariff threat roils markets, Fed turmoil is threatening dollar supremacy, Rieder gains support for Fed chair, JGB’s under pressure as Japan's parties mull consumption tax cut, Swiss sight deposits, final Eurozone & Canada CPI reports in focus
Good morning,
I hope all is well.
Here are the main overnight news and market movers:
Markets: Risk aversion reigns
Risk aversion is dominating the markets. Major stock indices opened lower, likely due to Trump’s tariff threats and potential EU retaliation. Interestingly, long-term bond yields are rising rather than falling, indicating that investors are not treating them as safe havens. Fiscal concerns—such as Japan’s proposed sales tax cut—may be contributing, with Japanese bonds feeling particular strain and food-related stocks jumping on rumours of a temporary tax break.
Another notable development is the softer US Dollar, which is unusual since it typically strengthens during crises; if this weakness persists, it could be concerning. The Swiss franc is stronger across the board.
Not surprisingly, precious metals are climbing as investors seek safe-haven assets, while cryptocurrencies are declining. Oil prices are down, while copper prices are rising.
US natural gas futures jumped as the weather outlook for late January shifted colder, Bloomberg reported.
Trump’s tariff threat on Europe sparks pushback and legal uncertainty
The main news over the weekend was US President Trump’s announcement to introduce a 10% tariff on eight European nations, including Denmark, after Denmark said it would conduct token NATO military exercises in Greenland. The tariff threat was met with pushback from European leaders, including UK Prime Minister Keir Starmer, French President Emmanuel Macron, and Swedish Prime Minister Ulf Kristersson, who criticised the move. However, the tariffs may not take effect, with some analysts saying it's unlikely they will kick in due to a Supreme Court case and other factors, Bloomberg reports. Still, European leaders are discussing their next steps and considering legislation to block the levies.
Meanwhile, French President Emmanuel Macron will request the activation of the European Union’s anti-coercion instrument, according to Bloomberg. The European Union’s Anti-Coercion Instrument (ACI) is a legal and policy tool designed to protect the EU and its Member States from economic coercion by third countries. Economic coercion refers to situations in which a country outside the EU seeks to pressure the EU or a Member State into making a particular decision by applying, or threatening to apply, measures that affect trade or investment—such as tariffs, import/export restrictions, or other trade barriers, according to Wikipedia.
European capitals may hit the U.S. with 93 billion euros ($107.71 billion) worth of tariffs or restrict American companies from the bloc's market in response to U.S. President Donald Trump's threats to NATO allies opposed to his campaign to take over Greenland, the Financial Times reported on Sunday. The retaliation measures are being drawn up to give European leaders leverage in pivotal meetings with Trump at the World Economic Forum in Davos this week, the FT report said, citing officials involved in the preparations for the meetings in Switzerland. (RTRS)
Deutsche Bank says Euro pain from Trump limited by US asset exposure
The fallout on the euro from President Donald Trump’s renewed trade threats toward European governments over Greenland may be limited because of how much the US relies on the region for capital, according to a Deutsche Bank AG strategist. Europe is the US’s largest lender, with its countries owning $8 trillion of US bonds and equities, almost twice as much as the rest of the world, according to George Saravelos, Deutsche Bank’s global head of FX research. “In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part,” he said. “Developments over the last few days have potential to further encourage dollar rebalancing. With the US net international investment position at record negative extremes, the mutual inter-dependence of European-US financial markets has never been higher,” Saravelos said. “It is a weaponization of capital rather than trade flows that would by far be the most disruptive to markets.” (BBG)
Rick Rieder of BlackRock gains support for Fed chair
According to Bloomberg, Rick Rieder from BlackRock has emerged as a strong contender for the next Federal Reserve chair, sources say. After a positive interview with Trump, Rieder is now competing with three others: Kevin Hassett, Christopher Waller, and Kevin Warsh. Some sources note that Rieder may have an easier path to confirmation, as key senators have indicated that Trump's Fed nominees will be closely examined. Meanwhile, Bloomberg reports that White House economic adviser Kevin Hassett said President Donald Trump may well keep him in his current job, which would eliminate him from contention for the next Federal Reserve chair. “From the beginning, he and I have talked about whether it’s better for me to be here in the West Wing or over at the Fed,” Hassett said on Fox News’ The Sunday Briefing. “I don’t think he’s made a final call on that.”
Fed turmoil is threatening dollar supremacy just as China pushes the Yuan
The WSJ reports that a criminal investigation into Fed Chair Jerome Powell is seen as undermining the U.S. financial system, potentially benefiting China’s currency. China is expanding its yuan-dominated financial networks and encouraging its use in international transactions and lending to developing nations. Roughly half of China’s cross-border transactions are now denominated in its own currency, compared with almost nothing 15 years ago, according to official data.
How the attacks on the Fed could backfire
Randall Forsyth suggests in Barron’s that direct economic controls may increase before the midterms, with legal actions against the Fed as an example. History from the 1970s shows such tactics often lead to long-term problems, like the stagflation after Nixon’s wage-and-price controls and loose Fed policies—a lesson now overlooked.
Eurozone to select ECB deputy ahead of major board overhaul
Euro-area finance ministers are set to choose the European Central Bank’s next vice president on Monday. The appointment is part of a revamp of the Executive Board. It may set the stage for Christine Lagarde's succession to the top job, with the ECB presidency becoming available in November 2027, according to Bloomberg.
Japan's parties mull consumption tax cut ahead of election
Nikkei reports that lowering Japan's 10% consumption tax may become a major topic in the upcoming lower house election on February 8, with both ruling and opposition parties debating whether to propose a reduction in their campaign pledges. Within the ruling Liberal Democratic Party, there was a proposal to temporarily exempt food from taxation.
Japanese households expect prices to keep rising, survey shows
Most Japanese households expect prices to keep rising over the next few years, a BOJ survey showed on Monday, reinforcing the view that the country is seeing conditions fall into place for further increases in still-low interest rates. The ratio of households who expect prices to rise a year from now stood at 86.0 per cent, compared with 88.0 per cent three months earlier. On average, households expect prices to rise 11.6 per cent a year from now, compared with 11.9 per cent in the September survey, a sign rising living costs are keeping household inflation expectations elevated. In the quarterly survey, 83.0 per cent of households expect prices to rise five years from now, lower than 84.8 per cent in the previous poll. (CN)
UK productivity rise points to economic recovery, study says
Britain may be overcoming its productivity issues, with output per hour reportedly increasing at rates unseen since before the financial crisis, according to the Resolution Foundation. The think tank attributes this surge to improved measurement and a reduction in unproductive "zombie" firms. (BBG)
China's Q4 GDP hits 3-year low, but annual growth meets target
China's economic growth slowed to a three-year low in the fourth quarter as domestic demand softened, while the full-year pace met Beijing's target. Trade tensions and structural imbalances, however, pose significant risks to the outlook. China's economy grew 4.5% in the fourth quarter from a year earlier, data from the National Bureau of Statistics (NBS) showed on Monday, slowing from the third-quarter's 4.8% pace as consumption and investment dragged. (RTRS)
China home prices drop again amid rising calls for action
China's home prices declined in December, with new-home prices down 0.37% and resale values falling 0.7%. The property slump, ongoing for over four years, has driven nationwide sales to 7.3 trillion yuan last year. Despite government promises of policy support, analysts expect further price declines for at least two more years, according to Bloomberg.
BOJ meeting outlook
The Bank of Japan (BOJ) will announce its interest rate decision on Friday, January 23rd. According to a Bloomberg survey, all 52 economists surveyed see an unchanged outcome after policymakers raised their overnight interest rate last month to 0.75%, the highest in 30 years. Nearly 60% of surveyed economists already think the central bank has fallen behind the curve. 68% of polled BOJ watchers see one rate hike every six months, and three-quarters see the yen as a risk that could hasten the next interest rate move by the BOJ. In that regard, BOJ officials are paying increasing attention to the yen’s potential impact on inflation, according to sources. “There is a growing view that the BoJ may be placing greater weight than before on the possibility that yen depreciation could heighten inflationary pressures through import prices, and that the monetary policy reaction function may become somewhat more responsive to foreign exchange developments,” said Shoki Omori, chief desk strategist at Mizuho Securities. (FT) A key focus will be the release of the quarterly Outlook for Economic Activity and Prices. Sources indicate the BOJ is likely to revise up its economic growth and inflation forecasts for fiscal year 2026, reflecting the resilience of the domestic economy and the government's recent stimulus measures.
Today’s Macro Roadmap: Swiss sight deposits, Final Eurozone & Canada CPI reports in focus
In Switzerland, the SNB will release its update on sight deposits for last week at 10:00 CET. They are far from a perfect proxy for SNB interventions in foreign exchange markets and are influenced by other factors, yet they remain worth monitoring. In its latest statement, the central bank reiterated its willingness to intervene as necessary.
However, there are seasonal distortions around the turn of the year, which could artificially depress sight deposits in December and inflate them in January as consumers withdraw cash at the end of the year for Christmas purchases, leading to a decline in sight deposits and vice versa in January, when the hangover kicks in.
The next chart shows sight deposits in levels and changes relative to last year, to adjust for these seasonal effects. Interestingly, sight deposits increased in December amid Swiss franc strength, which might indicate SNB FX intervention. However, we will only find out once the official data is released with a three-month delay.
Headline CPI for December is projected at 2.2% year-over-year. According to CIBC, lower gasoline prices will reduce the headline CPI, but food price inflation will rise year over year as the impact of last year's temporary GST removal fades. December typically sees overall prices drop; a 0.4% unadjusted CPI decline equates to about a 0.2% fall after seasonal adjustment. Core inflation is forecast to average 0.15% for the month and slightly above 2.5% year over year.
Good luck today!