The US President Donald Trump continued to rock the boat called “globalization” by signing a decree on the tariff introduction for steel and aluminium on Thursday. Contrary to unshakable rhetoric, the president stepped back from his “no-exception stance”, exempting Mexico and Canada from tariffs, and also retained the possibility of a duty-free trade for other trading partners

Plans for tariffs that will come into effect in 15 days have caused dissatisfaction with fellow party members who fear for their reputation in the event that US trading partners take retaliatory measures and do irreparable harm to the American economy. Nevertheless, some of the Democrats praised the decision, including Sen. Joe Manchin of West Virginia, who stated that the tariffs are in line with the interests of the United States to achieve a strong position in the global economy.

Trump’s unexpected decision to shake up strong ties with trading partners threatening tariffs, inflated market risks, making trading wars the main topic of the trading. The extent of yesterday’s measure suggests that Trump had to make concessions to the Republicans, as well as influential lobbyists, whose customers are interested in low domestic prices for steel and aluminium.

Canada, the largest supplier of aluminium and steel in the US, welcomed Trump’s decision to release Canada from taxes but continuing to insist that it is necessary to ensure that the threat of duties does not appear again. The Trump’s “white list» is for the countries that in his opinion “support fair trade conditions with the US” hinting to Mexico and Canada that in return he is waiting for concessions in negotiations on the NAFTA agreement. But Mexican economy minister hastened to stop speculations, saying that negotiations on NAFTA are independent and should not be subjected to external pressure.

China condemned the actions of the US government stating that it is strongly against tariffs and that they can disturb the normal order of the international trade.

What did not go to Mexico and Canada fell on the shoulders of other countries supplying aluminium and steel in the US, since according to the decree 80% of domestic demand should be met by local producers. Nevertheless, the steel and aluminium industries were not satisfied with the decision as they expected more aggressive protectionism – shares of companies that could benefit from tariffs rolled back after growth in the previous days. Steel index from S&P closed in the red, losing 2.53%.

A light version of Trump’s tariff regulation caused a strengthening of the dollar and shares of companies which are steel and aluminium consumers. Given that uncertainty has receded, the dollar got rid of another burden from its shoulders, opening up a room for growth on today’s report on employment and wages.

NFP Report

The NFP report is likely to show robust job growth in February and an update to the unemployment record, which according to last month’s data was at a 17-year low of 4%. However, wages are expected to slow growth after rising three consecutive months. Information on the labour market from the Labor Department usually attracts close attention of traders and today’s figures will probably help the market determine whether it will expect four rate hikes or stop at three. The March increase of 25 percentage points to 1.50% is practically a valid event for the markets. The Fed predicts three rate hikes this year, but the markets have arguments for waiting for four rounds of policy tightening, given that Federal Reserve Chairman Powell expressed that his personal opinion about the economy is quite optimistic. In a speech before the Congress, he said that the Fed does not want to stay behind the yield curve (the structure of rates on government bonds of various maturities).

According to the consensus forecast, the US labour market expanded in February by 200,000 jobs due to unseasonably mild weather. This is higher than the average increase of 181K and almost 100K jobs higher than the required level to maintain a balance with the labour force in the country.

The generosity of employers this time may surprise the market given that companies such as Starbucks, FedEx, will use unexpectedly received a gift from the state in the form of tax cuts to increase their employees’ salaries. Wall Mart announced an increase in employee salaries starting in February, which can be noticeably reflected in the data, given that the company employs 2.3M employees. Investors expect that due to measures of the government, the Fed and the world economic growth, unemployment in the country will drop to 3.5%.

The decision of the Japanese Central Bank

The Central Bank headed by Haruhiko Kuroda left politics unchanged, but exuded optimism about the future, emphasizing that ultra-soft conditions help the economy out of the deflationary trap. Kuroda used the press conference to assure the markets that it would be better to think of nothing better than QE. According to the comments of the Central Bank, the economy is growing and the observed growth in income will soon shift inflation expectations to the positive side, stimulating consumer spending.

The Bank of Japan targets the yield curve at -0.1% for short-term rates and 0% for long-term rates, discouraging the banking sector from investing in state bonds, forcing them to credit the economy.

In the comments of the bank, investors’ interest was caused by a change in the wording regarding residential investment, which, in the opinion of the bank, “weakened” in comparison with the previous formulation “remained unchanged.”

The assessment of the economic condition of the Central Bank also included the dynamics of wages, which showed the strongest decline in six months and raised concerns about the sustainability of economic growth. The informal goals of the Central Bank include maintaining the yen at an artificially low level to protect profits of exporting sector, the main economic driver for today.

The soft position of the Central Bank caused a weakening of the yen, as it became clear that the Central Bank feels comfortable in a deaf defence. USD/JPY grew by half a percentage point to the level of 106.72, GBP/JPY added the same amount, holding at the level of 147.50. Further dynamics obviously depends on the perception of risk by investors who are waiting for the results of the US trade confrontation, as well as US labour market statistics.

Share this post: