Trump issues more tariff threats, raising Canada to 35% and suggesting a 15 or 20% tariff rate to apply to remaining countries. Risk sentiment to remain dampened by Trump's weekend threat to lift EU and Mexico tariffs to 30%

Friday ended the week as it began, with President Trump issuing more threats to raise tariffs. This saw equity markets trade on a more cautious note and contributed to a modest broad-based lift in the USD.  Bond investors weren’t impressed with the messaging and global rates rose, seeing the US 10-year rate close near the top end of its weekly trading range, above 4.4%. Risk appetite is likely to remain suppressed as the new week begins after Trump threatened higher tariffs for the EU and Mexico over the weekend.

Trump was in the spotlight again on Friday, threatening to impose a 35% tariff on goods from Canada from 1-August.  This was later clarified as effectively lifting the current 25% rate that applies to non-USMCA compliant goods.  This immediately sent USD/CAD up over 0.5%, later reversed somewhat, and risk-sensitive currencies like the NZD and AUD headed lower.

Trump also had a phone interview with NBC news, where he said “we’re just going to say all of the remaining countries are going to pay, whether it’s 20% or 15%. We’ll work that out now”.  Tariff rates were raised to 10% for most countries in April so by August many of these might see their tariff rate double, something the market isn’t factoring in.  Taken literally, NZ’s current 10% rate would rise to either 15% or 20% from 1-August.

Meanwhile, Bloomberg reported that Vietnam’s leadership was caught off guard when Trump announced a 20% tariff for the country, with Vietnamese negotiators believing they had secured a rate between 10-15%. There has been no formal agreement or follow-up documentation to Trump’s social media post early July that mentioned the 20% rate.  Needless to say, ongoing uncertainty about US tariff policy remains very high, to the detriment of business confidence and investment.

Over the weekend, Trump added the EU and Mexico to the list of countries receiving letters of threats of higher tariffs from 1-August, both set at 30%. For the EU, this would be a lift from the current 10% rate that applies and for Mexico from the current 25% rate that applies for goods not compliant with the USMCA deal.  In response, EC President von der Leyen said the EU would suspend its retaliatory tariffs that were due to come into effect 15-July until early August, to allow more time for negotiation. Trump had spoken to European leaders von der Leyan, Macron and Merz on Friday and agreed to use the next two weeks to find a solution.

Against a backdrop of more tariff threats and the recent strong rally in equities, global equity markets were broadly weaker on Friday, a day after the MSCI World Index posted a record high.  The S&P500 fell 0.3% and the Euro Stoxx 600 fell 1%. Overall, last week’s threats of higher tariffs had a muted impact on the market, with investors assuming that there is still time for negotiation.

The bond market also traded on a cautious note, with rates higher across the major markets.  The US Treasuries curve showed a notable steepening, with the 2-year rate up 1bp to 3.89%, the 10-year rate up 6bps to 4.41% and the 30-year rate up 8bps to 4.95%, the longer-term rates back towards the top end of their weekly trading range.  Chicago Fed President Goolsbee said that the latest threats to raise tariffs have muddied the inflation outlook, saying these could spark fresh concerns about inflation, which might force the Fed to maintain its wait-and-see posture until the central bank gets more clarity.

In economic news, UK’s economy contracted for a second consecutive month in May, by 0.1% m/m following the 0.3% contraction in April, adding to the chance of a very weak GDP print for Q2, after the surprising strength recorded in Q1. While the impact on the rates market was small, with a 25bps cut by the BoE at the next meeting early August well priced, GBP was the weakest of the majors on Friday night, closing the week below 1.35 and pushing NZD/GBP above 0.4450.

Canada’s labour market report was much stronger than expected, with employment rising 83k in June against expectations of a flat result, nudging down the unemployment rate to 6.9% against expectations for a nudge up to 7.1%. The data saw the market pare back pricing for another rate cut at the end of the month to just 4bps and resulted in higher Canadian-US rate spreads, but there was no lasting impact on the Canadian dollar.

While the NZD traded a tight range on Friday night, weaker risk sentiment from all the tariff noise saw it sustain the loss seen during local trading hours, and it closed the week a little over 0.60.  NZD/AUD continued to edge lower, closing the week around 0.9135, down a full cent from the rate prevailing just ahead of the RBA’s shock decision to keep rates steady, which resulted in lower NZ-Australia rate spreads.

The domestic rates market ended the week on a quiet note, with little change in rates for the day and little net change over the week overall.  NZ’s PMI for June recovered only 1.4pts from the steep fall in May, adding to the array of data pointing to economic stagnation in Q2, after decent growth over the previous two quarters. The RBNZ’s nowcast estimate of Q2 GDP has been trending lower since early May, with the latest update at minus 0.25%.

On the calendar today, NZ’s performance of index is released today for June, with interest in whether the index can bounce back from the steep fall in May.  Electronic card transactions data are also released, with Chinese trade data later today.

Unlike last week, there are plenty of top-tier global economic releases in the week ahead, with US CPI and PPI inflation and retail sales data.  CPI data are also released for Japan, Canada and the UK.  China sees Q2 GDP and monthly activity indicators for June.  Australian and UK labour market reports will also be of interest. Focus is also likely to remain on Trump’s tariff threats, keeping a lid on risk appetite.