US equities trading flat, complacent about threat of higher tariffs; US Treasury yields higher and curve steeper. Net currency movements have been modest, with the AUD a clear outperformer after the RBA shock

Markets have settled somewhat after the initial shock yesterday of Trump starting to announce the punitive tariffs that will be in place from 1 August for countries where trade negotiations haven’t gone well.  US equities are flat, US Treasury yields are higher, and the curve is steeper again.  Net currency movements have been modest, with the AUD a clear outperformer after the RBA shocked the market by not cutting rates.

Yesterday, President Trump told reporters that the door was left open for trade negotiations for those countries that had received their letters informing them of the tariff rates that would be applied from 1-August.  The new tariff rates were close to the punitive levels reported on Liberation Day.  Trump said if countries call with a different offer “and if I like it, we’ll do it”, adding that the current offer on the table was firm but not 100% firm.

Some media interpreted the comments as just another delay to tariffs and the date being a moveable feast, but Trump clarified overnight “There has been no change to this date, and there will be no change. In other words, all money will be due and payable starting AUGUST 1, 2025 - No extensions will be granted.” Thus, while the tariff rates appear negotiable, Trump has made it clear that there will be no further delay to implementation. At the time of writing, no new tariff letters had been announced in addition to those released yesterday morning, but they can come at any given moment.

In additional tariff news overnight, Trump told reporters he planned to implement a 50% tariff rate on copper as part of a set of looming sectoral tariffs (these are separate to the country level tariffs which are being rolled out).  On pharmaceuticals, he said higher tariffs wouldn’t come in for another 12-18 months, but “they’re going to be tariffed at a very, very, high rate, like 200%...we’ll give them a certain period of time to get their act together”. US copper prices are up over 10% to a record high, taking the YTD gain to about 35% as markets have been anticipating a higher tariff. As US domestic production of copper can’t be increased over coming years – it takes years to develop a mine – higher prices will directly feed into inflation pressure.

There have been plenty of rumours about where US-EU trade negotiations sit, with diplomats relaying conversations.  US Commerce Secretary Lutnick said the EU has made real offers to the US and the bloc is indicating it will open markets.  He added that Trump is deciding how to play those.

US equity markets aren’t convinced that country-level tariffs will be higher than they currently are and, while trading with a cautious tone, the S&P500 is flat. Bond investors are taking higher tariffs a little bit more seriously, with rates higher and curves steeper for a second day, with rates up 1-4bps. The 30-year Treasury is approaching the 5% mark again. The 3-year bond auction didn’t go particularly well, with rates pushing higher into the event and still clearing slightly above the prevailing yield, with investor demand extremely weak. Global rates are also higher, with UK and Germany 10-year rates up 4bps.

US economic data releases haven’t been in focus, but for the record, year-ahead inflation expectations from the NY Fed’s survey fell 18bps to a five-month low of 3.02% in June, while the three and five-year measures were unchanged at 3.00% and 2.61% respectively. The headline NFIB index of small business sentiment was little changed at 98.6.

Yesterday, the RBA shocked the market, keeping policy steady against high expectations of a 25bps cut.  The market was nearly fully priced for a cut, but Governor Bullock explained that the Bank had limited ability to influence market pricing ahead of the decision, largely due to the new board voting structure that makes rate moves less predictable. For the first time, the Bank published unattributed votes of the nine members and the decision to hold was 6-3.  Governor Bullock emphasised that the decision to hold was about timing rather than direction.  The Board “could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis”.

Australian rates and the AUD jumped higher on the decision.  While the market still sees the cash rate falling to around 3%, a high chance is given of the Bank delivering the next rate cut in August, pausing in September and cutting again in November, with further easing next year.  The AUD has been the best performing of the majors, albeit on a day of small net currency movements, and it is up just 0.5% from this time yesterday to 0.6530. NZD/AUD has fallen below 0.92, settling just below that mark. To the extent that the RBA decision was more one of timing, it doesn’t change our outlook for a relatively flat cross rate.

The NZD itself is a touch weaker overnight, against a backdrop of broad USD support.  The currency slipped to a low of 0.5980 overnight and is currently around 0.60.

JPY is the weakest of the majors again as the market digests the higher tariff rate announced yesterday and complications of that decision ahead of the forthcoming election.  It won’t help the leading LDP party’s chance in the election, injecting some political uncertainty into the mix.  NZD/JPY is trading at a five-month high above 88.

The domestic rates market closed just ahead of the RBA announcement.  It was a quiet session ahead of the RBNZ’s meeting today, with higher rates across the curves by 1-3bps, but less than seen against the US and Australia.  Since the NZ close, the Australian 3-year bond future is up 10bps in yield terms, while the 10-year rate is up 9bps, which should impart an upward bias to NZ rates on the open.

In the day ahead, Chinese inflation data will be released, ahead of the RBNZ’s Monetary Policy Review.  Most analysts agree that the OCR will be left unchanged at 3.25%, the first pause in the easing cycle since it began last August.  Forecasts won’t be updated, and we expect a short policy assessment that keeps the Bank’s options open regarding future policy decisions.  With the market pricing about 40bps of further cuts, a neutral statement would likely come across as hawkish for those expecting a nod toward further easing.