President Trump's 90-day tariff delay came alongside a significant deterioration in the trade war between the US and China, leading to another hugely volatile week in broad markets. The White House says it has raised tariffs placed on China to 145%, which Beijing has countered with a 125% tariff rate. A sudden stop to trade between the world's two largest economies will have ripple effects more broadly on demand and supply conditions. US equities ended the week higher, but a negative rerating of the US outlook was clear in FX and fixed income. The dollar belied its reserve status, behaving more like an EM currency as it fell below the 100 level for the first time since mid-2023 alongside a brutal selloff in the Treasury market, over the week the 2-year yield lifted by 31bps - despite 3 Fed cuts expected by year-end - while the 10-year yield surged 50bps. Safe-havens CHF and JPY have been favoured, but equally the more cyclically exposed EUR and AUD have gained significantly. Meanwhile, higher daily fixings have indicated China is weakening the Yuan as part of its response to the trade war.
In any other week, a cooler-than-expected US inflation report would have been the major story; however, it was largely dismissed by markets given the looming impacts to prices from tariffs. This was captured in the University of Michigan consumer survey where year-ahead inflation expectations shot up to 6.7% - the highest reading since 1981. Headline CPI declined 0.1% month-month in March (vs 0.1% expected), slowing from 2.8% to 2.4%yr (vs 2.5%). This was backed up by a weaker reading in the core series at 0.1%m/m (vs 0.3%) and 2.8%yr (vs 3%), down from 3.1% previously.
Comments from RBA Governor Bullock on the global situation were kept brief during a non-policy related speech on Thursday. A 25bps cut is a lock for the 19-20 May meeting, but a message of stability from the governor gave no sense the RBA is thinking along the lines of a 50bps cut nor convening ahead of schedule to deliver an emergency cut as has been speculated. Instead, the governor said the RBA will take its time to work through various scenarios of what the tariff shock will mean for domestic growth and inflation. The early indications are that households have been unnerved by developments - the Westpac-MI index of consumer sentiment saw a sharp 6% fall in April - but the key for the RBA is in watching how this translates into household spending, business investment and hiring decisions. For businesses, the NAB survey in March business confidence was weak (-3) and conditions were moderate (+4) ahead of the tariff turmoil.
