US 25% tariffs on steel and aluminium take effect prompting retaliatory actions from the EU. US CPI weaker than expected though tariffs create uncertainty looking forward. Bank of Canada cuts rates by 25bp to 2.75% as expected

Ongoing global trade tensions remain a focus for markets. The White House confirmed 25% tariffs on steel and aluminium would come into effect yesterday, without exemptions for any US trading partners. This prompted a response from the European Union which launched countermeasures on €26 billion of US imports. US equity markets are higher in afternoon trading though price action remains volatile. There was a muted response to softer than expected US CPI data.

US inflation was weaker than consensus estimates in February. Headline CPI increased 0.2% m/m taking the annual rate to 2.8%. Core inflation was also below expectations, increasing 0.2% on the month, with the annual rate dipping to 3.1%. The softer core reading reflected a sharp fall in airline fares.

Consumer prices have not been materially impacted by the initial 10% tariff on China that took effect on February 4. However, business surveys point to upward pressures for goods prices and there is considerable uncertainty about what the actual tariffs will be and the eventual pass-through to consumer prices.

US treasury yields dropped immediately after the CPI release but have rebounded and settled 3-4bp higher across the curve. 10-year yields increased 3bp to 4.31%, which corresponds with the top end of the trading range from the past few weeks. In Europe, 10-year bunds traded back to the recent high at 2.94%, but retraced to be little changed on the session, and closed at 2.88%.

Japan’s 30-year government bond yield reached 2.63% yesterday, which is the highest level since 2006, and is set against the backdrop of the Bank of Japan’s gradual tightening cycle. Governor Ueda indicated he was comfortable with the rise in yields when speaking in parliament. He said there wasn’t a big gap between the market and central bank’s view on the economy and inflation.

The Bank of Canada cut rates by 25bp to 2.75%. This was expected by economists and was fully discounted by market pricing. The Bank noted the trade tensions with the US could have a significant impact on the economy. Governor Macklem said it will proceed cautiously on further easing, citing the need to assess the interplay between upward pressure on inflation, and weakness in demand. The market is pricing 46bp of additional easing by the end of the year.

In currency markets, the US dollar retraced from initial gains resulting in small absolute changes for the euro and yen since the NZ close. Outside of the majors, most G10 FX pairings have strengthened against the US dollar. There was limited reaction in the Canadian dollar to the expected reduction in the policy rate. NZD/USD traded up towards 0.5730. The NZD gained against the euro and yen but is stable on the other major crosses.

NZ fixed income yields moved higher in the local session yesterday reflecting moves in offshore markets with limited domestic catalysts. Total electronic card spending was flat in February for the second consecutive month, providing a reminder about the subdued pace of the economic recovery. The yield curve continued the recent steepening trend. 2-year swaps rates increased 4bp to 4.32% while 10-year rates closed 7bp taking to the 2y/10y curve to a fresh cycle high.

The government curve matched the move in swaps. 10-year NZGB yields increased 7bp to 4.68% and are back at the top end of the trading range from the past month. Australian 10y bond futures are little changed since the local close yesterday, which suggests limited directional bias, for NZ yields on the open.

The bond market looks ahead to the weekly tender today. As usual, there are NZ$500m of nominal bonds being auctioned across the May-2030 ($250m), May-34 ($200m) and May-2054 ($50m) lines. The 2054s have only been tendered twice previously since the line was syndicated a year ago. There is also $30 million of Sep-40 inflation indexed bonds being tendered for the second consecutive week.

It is mainly second tier economic data in the day ahead. In NZ, there are net migration figures for the month of January. US PPI data for February will allow analysts to finetune their forecasts for the core PCE deflator, which is the Fed’s preferred inflation gauge, and is released at the end of the month.