MNI EUROPEAN MARKETS ANALYSIS: China Tariffs Curbs Risk Rally

• China announced a return of serve to the US with tariffs, and a probe on Google. This followed the passing of the US deadline, which was midnight Tuesday US ET time. The better risk tone before these headlines printed has waned, but follow through has been limited.
• The USD is higher but well off Monday intra-session levels. US yields are little changed.
• Looking ahead, the US response will be gauged to China's tariff hikes. Note we also have: Fed’s Bostic and Daly speak later and US December JOLTS job openings and orders print. France’s December budget statistics and January Spanish unemployment are also out.

MARKETS

CROSS ASSET: Risk Off On China Tariff Headlines But Limited Follow Through

Risk appetite has waned on the passing of the US tariff deadline (midnight US time) which was quickly followed by China counter measures, including tariffs on US commodity exports (and other products) while also launching an antitrust probe into Google. The follow through has been fairly modest at this stage though. Looking ahead focus will be on the US response now, with China's MinFin stating the tariffs will come into effect on Feb 10. 

• US equity futures dipped into the red on the headlines, but are now back close to flat The USD is up, the BBDXY index close to 1309.3 (post headline highs were at 1311.08).
• Oil is down, WTI holding under $72/bbl and close to session lows. US yields are holding slightly higher at the front end. The 10yr yield was last near 4.56%, up from post tariff headline lows of 4.54%.
• Regional equities are still mostly in the green, but away from earlier highs. The HSI is +1.9%, after being up as much as 3.30% earlier, Japan's Nikkei & TOPIX are both up about 0.75%, while Australia's ASX 200 is unchanged for the session.
• USD/JPY initially dipped, but is now back above the 155.00 level. AUD and NZD are slightly up from session lows. USD/CNH got to 7 3365, but sits back around 7.3210 in latest dealings, only 0.15% weaker for the session. 

GLOBAL MACRO: Deal With NAFTA More Important To US Economy Than With China

Mexico and Canada are highly exposed to the US and have reached deals to delay 25% tariffs by 30 days. China didn’t come to an agreement and a 10% trade tax has been imposed on all US imports from China. It has retaliated with export controls on certain minerals, an anti-trust investigation into Google, and 10-15% tariffs on oil, coal, LNG and agricultural machinery imports from the US. The key though is that the US is less exposed to trade restrictions than all the regions it is targeting. 

• US goods exports account for around 7% of GDP compared with 26% for China & Canada and 20% for the EU. Mexico is a lot closer at 8%. Thus the US can weather a trade war better than the others.
• US merchandise exports to China account for around 7% of its total and only 0.5% of GDP. In comparison, China’s shipments to the US are worth over 14% of its exports and around 2.8% of GDP. Thus it is not surprising that China didn’t respond to the US’ universal 10% tariff with a universal tariff of its own.

US merchandise exports by destination % total 2024

• Around 13.5% of US imports are from China worth about 1.5% of GDP. Mexico and Canada together are around 28% of imports and over 3% of GDP. Again it is not surprising that the latter could find common ground with the US and that the US felt it didn’t have to form a deal with China. While a 10% tax on Chinese imports will lift prices, particularly in certain sectors, overall it is less likely to be an issue for the US economy than 25% on NAFTA members.
• Just under 20% of US imports come from the EU worth 2% of US GDP and 18% of US exports go to the region worth 1.3% of GDP. There is likely room to negotiate a deal with the EU too.

US merchandise imports by source % total 2024

Source: MNI - Market News/Refinitiv

US TSYS: Tsys Futures Slightly Lower As China Tariff Deadline Nears

• Tsys futures edge lower as the deadline on the China tariffs near while Trump has agreed to delay 25% tariffs on Mexico & Canada. TU is unchanged at 102-24 1/4, while TY is -04+ at 108-26
• Earlier there was a block 2s10s flattener with a DV01 $245k, however little else in the way of notable flows
• Cash tsys yields are slightly higher today, curve has continued to flatten. The 2yr is +1.5bps at 4.264%, while the 10yr is +1.2bps 4.567%. The 2s10s is -0.5bps at 30bps.
• Projected rate cuts through mid-2025 have cooled slightly vs this Monday levels (*) as follows: Mar'25 at -3.5bp (-3.7bp), May'25 at -9.8bp (-10.3bp), Jun'25 at -19.2bp (-19.7), Jul'25 at -24.4bp (-24.9bp).
• Today we have Factory Orders & Durable Goods Orders while the Fed's Mary Daly will speak

JGBS: Cheaper, Fresh Cyclical High For 10YY, BoJ Aims For 2% Core CPI

JGB futures are sharply weaker, -27 compared to the settlement levels, but slightly above the session low set early in the afternoon session.

• BoJ's Ueda said on Tuesday the central bank will aim to achieve 2% inflation, as measured by the overall consumer price index, on a sustained basis. In gauging whether inflation will sustainably hit its target, the BoJ focuses on underlying inflation or the broad trend of price moves that strips away one-off factors such as fuel and volatile fresh food costs. (per RTRS)
• Cash US tsys are little changed in today’s Asia-Pac session after yesterday’s modest sell-off following news that President Trump agreed to delay a 25% tariff on Mexico and Canada.
• Cash JGBs are flat to 2bps cheaper across benchmarks. The benchmark 10-year yield is 1.5bps higher at 1.267% after setting a fresh cycle high of 1.275% after today’s supply.
• The 10-year JGB auction delivered mixed results, with the low price beating expectations but the cover ratio declining to 3.1809x from 3.3570x at the previous auction. The tail also lengthened slightly to 0.03 from 0.01.
• Swap rates are 1-3bps higher. Swap spreads are mostly wider.
• Tomorrow, the local calendar will see Labor & Real Cash Earnings and Jibun Bank Composite & Services PMIs. 

STIR: BoJ Dated OIS Mostly Softer Than Pre-BoJ Hike Levels

BoJ-dated OIS pricing is flat to 5bps softer across meetings through October compared to pre-MPM levels. 

• Prior to the January 23–24 MPM, market expectations reflected a 98% probability of a 25bp hike, a cumulative 99% chance by March, and more than a full 25bp increase (108%) priced in by May 2025.
• Currently, the probability of another 25bp hike in March stands at 0%, with a full 25bp increase not priced in until December.

Figure 1: BoJ-Dated OIS – Today Vs. Pre-BoJ MPM (January)

Source: MNI – Market News / Bloomberg

AUSSIE BONDS: Cheaper With US Tsys, New Mar-36 Bond To Be Priced Tomorrow

ACGBs (YM -4.0 & XM -5.5) are cheaper after dealing in relatively narrow ranges on a second-tier data day.

• Outside of the previously outlined household spending and ANZ-Roy Morgan Consumer Confidence, there hasn't been much by way of domestic drivers to flag.
• Cash US tsys are 1-2bps cheaper in today’s Asia-Pac session after yesterday’s modest sell-off following news that President Trump agreed to delay a 25% tariff on Mexico and Canada.
• Cash ACGBs are 5bps cheaper with the AU-US 10-year yield differential at -14bps.
• Swap rates are 4-5bps higher.
• The bills strip has bear-steepened with pricing -1 to -6.
• RBA-dated OIS pricing is flat to 4bps firmer across meetings today. A 25bp rate cut is more than fully priced for April (136%), with the probability of a February cut at 91% (based on an effective cash rate of 4.34%).
• Tomorrow, the local calendar will see S&P Global Composite & Services PMIs.
• The AOFM announced the issue by syndication of a new 4.25% 21 March 2036 Treasury Bond. The issue will be of a benchmark size. Initial price guidance is a spread of 2 to 5bps to XMH5. The issue is expected to be priced tomorrow.

AUSTRALIA: Latest CPI & GDP Lower Rate Projections But Not Estimating Easing Yet

The market has over a 90% chance of a rate cut at the RBA’s February 18 meeting and between three and four cuts by December, whereas in November this was closer to two. When we update our simple policy reaction function for Q4 CPI & OCR and Q3 GDP data, it continues to imply that rates need to be a bit higher to be in line with economic fundamentals using the RBA’s November projections but the end-2025 rate is 10bp lower than our November estimate.

• Our OCR calculations are 10bp lower than the November run across the horizon to Q2 2026 but the model still has 25bp of cumulative tightening over the four quarters to Q1 2026.
• The model includes the gap between the trimmed mean and the mid-point of the RBA’s target band. Since in November the RBA didn’t expect underlying inflation to reach 2.5% until end-2026, the equation doesn’t signal any monetary easing. It is forward looking including the inflation gap one quarter ahead.
• The contemporaneous output gap is also in the equation but doesn’t go negative enough to offset the positive inflation gap.
• We will update it again with the RBA’s new forecast set published with the February decision.
• It is worth noting that econometric analysis is just an estimate and not a forecast. 

Australia RBA policy reaction function with trimmed mean

AUSTRALIA DATA: Household Spending Signals Rise In Q4 Consumption

Australian household spending rose 0.4% m/m to be up 4.3% y/y in December, the highest since March. November was revised up significantly to +0.8% m/m & 3.2% y/y from 0.4% & 2.4%. This is consistent with the retail sales data released yesterday showing a recovery in household spending. Consistent with this is the third straight monthly rise in discretionary spending in December.

• Total household spending volumes rose 1.4% y/y in Q4 up from 0.2% in Q3 signalling a pickup including a solid quarterly rise in the national accounts version due on March 5. Furnishings, transport, clothing and recreation saw increases in annual growth. 

Australia real household consumption y/y%

Source: MNI - Market News/ABS

• Discretionary spending rose 0.6% m/m and 4.6% y/y in December, the highest in almost a year and the strongest of the main categories, after 0.9% & 2.8%. The growth was due to new vehicles, eating out, air travel & streaming services. Non-discretionary fell 0.2% m/m to be up 3.7% y/y.
• Services expenditure rose 0.3% m/m to be up 4.2% y/y down from 5.3% y/y, while goods rose 0.4% m/m to be up 4.4% y/y up from 1.5% y/y. There wasn’t payback for the discount-induced 1.2% m/m rise in goods spending in November.
• The ABS noted that “consumers have capitalised on the end-of-year sales season, driving a sustained rise in spending to finish 2024”.
• The household spending data will replace retail sales from 30 July 2025.

Australia household consumption y/y%

Source: MNI - Market News/ABS

BONDS: NZGBS: Closed With A Twist-Steepener Ahead Of Tomorrow’s Q4 Jobs Data

NZGBs closed showing a twist-steepener, with benchmark yields 2bps lower to 2bps higher, ahead of tomorrow’s Q4 Labour Market data. The ranges were relatively narrow. 

• Bloomberg consensus expectations for tomorrow’s labour market data are in line with the RBNZ’s November forecasts. The unemployment rate is projected to rise 0.3pp to 5.1%, employment to fall 0.2% q/q and private wages rise 0.6% q/q.
• An outcome close to this is unlikely to derail another 50bp of easing on February 19. It would have to print significantly better than expected for a smaller move. Weakness in activity makes that seem unlikely.
• Private wages growth sees forecasts between 0.4% and 0.8%. The RBNZ is slightly lower at 0.5% as are ASB and ANZ. Kiwibank and Westpac are in line with consensus while BNZ is higher projecting 0.7%.
• Swap rates closed 3bps lower to 1bp higher, with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed 1-4bps softer across meetings. 50bps of easing is priced for February, with a cumulative 129bps by November 2025.
• On Thursday, the NZ Treasury plans to sell NZ$225mn of the 4.50% Apr-27 bond, NZ$225mn of the 2.00% May-32 bond and NZ$50mn of the 2.75% May-51 bond.

NEW ZEALAND: Q4 Labour Market Forecasts Close To RBNZ November Projections

Q4 labour market data are released on February 5 and Bloomberg consensus expectations are in line with the RBNZ’s November forecasts. The unemployment rate is projected to rise 0.3pp to 5.1%, employment fall 0.2% q/q and private wages rise 0.6% q/q. An outcome close to this is unlikely to derail another 50bp of easing on February 19. It would have to print significantly better than expected for a smaller move and given the weakness of activity that seems unlikely. 

• Unemployment rate forecasts are between 4.9% and 5.3% with the RBNZ expecting 5.1%. The major local banks are all at 5.1% except for Westpac at 5.0%.
• Employment projections are between +0.1% q/q and -0.2% q/q with only three out of 15 analysts expecting it not to fall on the quarter. It is widely forecast to fall around 0.9% y/y. The RBNZ was slightly weaker in November projecting -0.3% q/q and -1.0% y/y. Jobs fell 0.5% q/q & 0.4% y/y in Q3.
• Private wages growth is expected to rise 0.6% q/q again with forecasts between 0.4% and 0.8%. The RBNZ is slightly lower at 0.5% as are ASB and ANZ. Kiwibank and Westpac are in line with consensus while BNZ is higher projecting 0.7%.

FOREX: USD Index To Session Highs As China Announces Tariffs, Yen Outperforming

The USD index sits close to session highs at the time of writing. The USD BBDXY index is above 1310, as seemingly no deal has been reached to delay the US tariffs on China imports. China has just announced counter tariffs of its own and also announced an anti-trust probe into Google. This includes 10% tariffs on oil and agricultural machines from the US and 15% on US LNG and coal exports. These will come into effect on Feb 10 per the China FinMin. 

• AUD and NZD are both down over 0.70%, although up slightly from lows seen post tariff headlines. AUD/USD was last 0.6180, session lows rest at 0.6171. For NZD/USD we are just under 0.5590, while EUR is down by 0.60%, to 1.0275/80. We are still also above Monday intra-session lows.
• USD/CNH got to highs of 7.3365, but sits back under 7.3300 in latest dealings.
• USD/JPY has fallen back to 155.00, as risk aversion in the equity space (US futures back into the red, after spending much of the day in positive territory). Regional equities are still mostly in the green, but off best levels for the session.
• The latest risk off move have seen us tsys yields now trade little changed for the session after initially rising 1-2bps. The 10yr yield was last -.0.8bps at 4.547%. Looking ahead, the US response will be gauged to China's tariff hikes. Note we also have: Fed’s Bostic and Daly speak later and US December JOLTS job openings and orders print. France’s December budget statistics and January Spanish unemployment are also out.

USD: Tariffs Near Term Key, Broader Macro Backdrop Still USD Supportive

Broader USD sentiment remains closely aligned to the near term tariff outlook, particularly as the China deadline approaches as we tick into US time Tuesday (currently close to 10:55pm Monday time in Washington).

• A delay in tariff implementation for China is likely to weigh on near term USD sentiment, all else equal. The USD BBDXY index, current above the 20-day EMA, albeit just, while further south is the 50-day day around the 1297 level. The chart below presents the index against all key EMAs. 

Fig 1: USD BBDXY Index Versus Key EMAs 

Source: MNI - Market News/Bloomberg 

• The drift lower in US real yields is another near term USD headwind. The real 10yr has moved off Jan highs of 2.34% to be back at 2.09%. Still, if we look at the US-EU real yield differential (proxied by the German real 10yr rate), it is hardly giving a bearish USD backdrop, see the second chart below.
• At +175bps in favour of the USD (relative to Germany), this is not suggesting a sustained turn higher in EUR, at least based off this metric
• The elevated US real yield backdrop is still a source of support for the USD, and as we argue in the next bullet remains supported by the broader macro backdrop. 

Fig 2: EUR/USD Versus US-GE Real 10yr Yield Differential. 

Source: MNI - Market News/Bloomberg 

USD: Data Surprises & GDP Expectations Still In Dollar's Favor

As we noted in the earlier bullet, the elevated level of US real yields is still providing support for the broader USD backdrop, even if tariffs are a key near term sentiment driver. The elevated US real yield backdrop, and uncertainty around degree of US easing this year is supported, at the current juncture by relative data outcomes and the US growth outlook. 

• The first chart below presents the Citi EASIs for major economies/regions. The US, which is the orange line has mostly been positive and at higher levels relative to other the major economies over this period. 

Fig 1: Major Economy Economic Activity Surprise Indices (Citi)

Source: Citi/MNI - Market News/Bloomberg   

• The second below plots the J.P Morgan economic growth forecast revision indices, again for major economies/regions. These indices measure the extent to which J.P. Morgan economists are either revising up or down their growth projections for a particularly economy or region (this can be for the short term or the longer term).
• In the past 12 months, the bias has been for US economic growth forecast upgrades, while other major economies/regions have largely flatlined. The exception was the UK, although since October its forecast revision line has been pushed lower.
• To the extent growth expectation revisions will reflect upside/downside data surprises, these metrics are likely to be watched in terms broader USD risks as we progress through the first half of 2025. 

Fig 2: J.P. Morgan Economic Forecast Revision Indices, By Major Economy/Region 

Source: J.P. Morgan/MNI - Market News/Bloomberg   
 
ASIA STOCKS: Asian Equities Surge On Tariff Pause

Asian equities rebounded sharply as US President Donald Trump delayed tariffs on Mexico and Canada, fueling hopes of a potential reprieve for China. Hong Kong stocks surged, with the Hang Seng China Enterprises Index jumping nearly 4% before paring gains, its biggest move since October, as markets anticipated trade talks between Trump and Xi. Japan’s Nikkei 225 rose 1.6%, led by auto and electronics stocks, while South Korea’s Kospi climbed 1.6%. Australia’s ASX 200 edged up 0.13%, supported by gains in tech and mining stocks, with gold miners benefiting from record-high gold prices.

ASIA STOCKS: Foreign Investors Dump Asian Equities On Tariff Fears

As markets slowly return from LNY, Trump Tariff headlines have equity markets worried, the tech heavy markets of South Korea & Taiwan saw large outflows on Monday, with Taiwan seeing over $2b leave the market, the largest outflow since Sept 2024.

• South Korea: Recorded outflows of -$663m yesterday, contributing to a 5-day total of -$1.45b. YTD flows are negative at -$1.67b. The 5-day average is -$290m, worse than the 20-day average of -$79m and the 100-day average of -$157m.
• Taiwan: Posted heavy outflows of -$2.04b yesterday, leading to a 5-day total of -$771m. YTD flows remain negative at -$3.30b. The 5-day average is -$154m, better than the 20-day average of -$194m but worse than the 100-day average of -$128m.
• India: Recorded flat flows on Friday and has a 5-day total of -$1.27b. YTD outflows are substantial at -$8.42b. The 5-day average is -$254m, better than the 20-day average of -$410m but worse than the 100-day average of -$155m.
• Indonesia: Posted -$17m in outflows yesterday, bringing the 5-day total to -$57m. YTD flows are negative at -$246m. The 5-day average is -$11m, close to the 20-day average of -$12m and the 100-day average of -$10m.
• Thailand: Saw -$11m in outflows yesterday, contributing to a 5-day total of -$65m. YTD flows are negative at -$341m. The 5-day average is -$13m, better than the 20-day average of -$17m and the 100-day average of -$15m.
• Malaysia: Registered -$34m in outflows yesterday, leading to a 5-day total of -$217m. YTD flows are negative at -$736m. The 5-day average is -$43m, worse than the 20-day average of -$36m and the 100-day average of -$26m.
• Philippines: Recorded +$12m in inflows yesterday, bringing the 5-day total to +$13m. YTD flows remain negative at -$102m. The 5-day average is +$3m, better than the 20-day average of -$5m and the 100-day average of -$2m.

Table 1: EM Asia Equity Flows

OIL: Crude Lower As Tariffs Delayed But Market Outlook Very Uncertain

Oil prices are lower again today with WTI down 1.1% to $72.37/bbl and Brent -0.5% to $75.55/bbl, holding above initial support levels. The 30-day postponement on US tariffs for Canada and Mexico has weighed on crude during APAC trading today. Talks are ongoing regarding the 10% on imports from China scheduled from midnight NY time today. The USD index is 0.1% lower. 

• Crude has risen on news of trade taxes but the outlook continues to worry the market. The strength of demand from China, the world’s largest oil importer, remains a concern plus the impact of an increase in trade tensions on global demand generally. On the supply side, President Trump plans to increase US production, while OPEC kept its quotas unchanged at its review yesterday but is still scheduled to begin normalising output from April.
• Another uncertainty is the sanction environment with US talks with Venezuela opening the possibility of an increase in its supply, while Iran and Russia could be hit with tighter measures.
• Today industry-based data on US crude inventories are released for last week. They rose sharply the previous week as Canadian producers have lifted flows to the US sharply ahead of possible tariffs. That trend may continue for the next month or until it is clear whether taxes will actually be imposed.
• The Fed’s Bostic and Daly speak later and US December JOLTS job openings and orders print. France’s December budget statistics and January Spanish unemployment are also out.

GOLD:  Gold Hits New Records in Tuesday’s Trading. 

• Gold’s ‘safe-haven’ status was evident during the Asian trading day as investors focused on ongoing tariff uncertainty emanating from the US.
• Yesterday’s weaker than expected day due to USD strength was pushed aside as gold rallied throughout the day to reach new all time highs.
• Opening at US$2,815.41 gold’s fortunes continued to fall, reaching a low of $2,772.23; before a dramatic turnaround to touch $2,830.74.
• Gold gave back some of the gains to close it’s US trading day at $2,815.21 and continued to trade up during the Asian trading day reaching a high of $2,824.64, before declining back to $2,818.70
• There was some unexpected beneficiaries from the threatened tariffs on Canada with Canadian gold stocks rallying aggressively in Monday’s trading session.
• If the tariffs are fully implemented, there is a chance it is good for gold’s fortunes as a trade war could create inflation or could be dollar negative.   
• Despite several materially down days, gold is already up over 6% in January and early signs are positive for ongoing gains in February. 

UP TODAY (TIMES GMT/LOCAL) 

Date	GMT/Local	Impact	Country	Event
04/02/2025	0745/0845		FR	France Budget Balance
04/02/2025	1000/1000	**	GB	Gilt Outright Auction Result
04/02/2025	1000/1000	**	GB	Gilt Outright Auction Result
04/02/2025	1355/0855	**	US	Redbook Retail Sales Index
04/02/2025	1500/1000	**	US	Factory New Orders
04/02/2025	1500/1000	***	US	JOLTS jobs opening level
04/02/2025	1500/1000	***	US	JOLTS quits Rate
04/02/2025	1600/1100		US	Atlanta Fed's Raphael Bostic
04/02/2025	1630/1130	*	US	US Treasury Auction Result for Cash Management Bill
04/02/2025	1900/1400		US	San Francisco Fed's Mary Daly
05/02/2025	2200/0900	*	AU	S&P Global Final Australia Services PMI
05/02/2025	2200/0900	**	AU	S&P Global Final Australia Composite PMI
05/02/2025	2330/0830	**	JP	average wages (p)
05/02/2025	0030/0930	**	JP	S&P Global Final Japan Services PMI
05/02/2025	0030/0930	**	JP	S&P Global Final Japan Composite PMI
04/02/2025	0030/1930		US	Fed Vice Chair Philip Jefferson
05/02/2025	0145/0945	**	CN	S&P Global Final China Services PMI
05/02/2025	0145/0945	**	CN	S&P Global Final China Composite PMI
05/02/2025	0745/0845	*	FR	Industrial Production
05/02/2025	0815/0915	**	ES	S&P Global Services PMI (f)
05/02/2025	0815/0915	**	ES	S&P Global Composite PMI (final)
05/02/2025	0845/0945	**	IT	S&P Global Services PMI (f)
05/02/2025	0845/0945	**	IT	S&P Global Composite PMI (final)
05/02/2025	0850/0950	**	FR	S&P Global Services PMI (f)
05/02/2025	0850/0950	**	FR	S&P Global Composite PMI (final)
05/02/2025	0855/0955	**	DE	S&P Global Services PMI (f)
05/02/2025	0855/0955	**	DE	S&P Global Composite PMI (final)
05/02/2025	0900/1000	*	IT	Retail Sales
05/02/2025	0900/1000	**	EU	S&P Global Services PMI (f)
05/02/2025	0900/1000	**	EU	S&P Global Composite PMI (final)
05/02/2025	0930/0930	**	GB	S&P Global Services PMI (Final)
05/02/2025	0930/0930	***	GB	S&P Global/ CIPS UK Final Composite PMI
05/02/2025	1000/1100	**	EU	PPI
05/02/2025	1200/0700	**	US	MBA Weekly Applications Index
05/02/2025	1315/0815	***	US	ADP Employment Report
05/02/2025	1330/0830	**	CA	International Merchandise Trade (Trade Balance)
05/02/2025	1330/0830	**	CA	International Merchandise Trade (Trade Balance)
05/02/2025	1330/0830	**	US	Trade Balance
05/02/2025	1330/0830	***	US	Treasury Quarterly Refunding