Now You See Them, Now You Don't

By Philip Marey, Senior US Strategist at Rabobank

The global bond sell off continued yesterday. Bund yields continued to rise and peaked at almost 2.93% early on Thursday, as the usually austere country is planning for a huge increase in defense spending. The 10 year US treasury yield continued its rebound from the 4.10% low on Tuesday and peaked at 4.34% yesterday. The 10 year Japanese government bond yields continued to rise and peaked at 1.545%.

At yesterday’s EU summit in Brussels, which included Ukrainian president Zelensky, all 27 leaders of Europe greenlit proposals that could free up billions of euros to boost defense spending. Except for Orban, 26 leaders signed a text calling for a peace deal that respects Ukraine’s independence, sovereignty and territorial integrity, while including Ukraine in the neogotiations. Meanwhile, Russian president Putin reminded Macron (‘Micron’) of Napoleon’s ill-fated Russia campaign in 1812.

In the US, President Trump questioned Article 5 again and Europe’s willingness to come to America’s rescue. He clearly missed that so far only the US has invoked Article 5 in reaction to 9/11 and that over 1,000 European soldiers lost their lives fighting alongside US forces in Afghanistan. Trump also questioned the US defense treaty with Japan, conveniently forgetting that after WW2 the US forced Japan to become semi-pacifist.

Yesterday, the ECB cut the deposit facility rate by 25 basis points to 2.50%. The ECB signalled that today’s rate cut will probably be one of the last in this cycle. We have postponed our forecast for the final rate cut from April to June, but the prospect for further cuts hinges on US trade policy and European defence spending. The ECB’s growth forecasts were revised down, factoring in uncertainty about trade policy. However, the ECB did not specify how much of this uncertainty was factored into the inflation estimates. More importantly, the forecasts are already outdated – primarily owing to Europe’s initiatives to increase defence spending. For more details, please read Bas van Geffen’s ECB postmeeting comment.

A day after Trump gave the auto industry a one month delay from the 25% tariffs on Canada and Mexico, other sectors that are USMCA-compliant also got a reprieve. In response, Canada said it would not proceed with the second installment of retaliatory tariffs on $87 billion of imports from the US later this month. However, Canada left in place the first installment of tariffs on $21 billion of goods, such as fruits, vegetables, household appliances and alcohol. Given the complexity of the USMCA compliance rules, estimates of the share of traded goods that are USMCA-compliant vary wildly. However, a White House official put it at 50% for Mexico and 38% for Canada. Some experts would attach a higher figure for Canada though. Anyway, this still means that the 25% tariffs continue to apply for a large fraction of imports from Canada and Mexico.

At the Wall Street Journal’s CFO Network Summit  yesterday, Fed Governor Waller said that Fed rate cuts can come either after good news of falling inflation or after bad news. He said “I’m still kind of believing that the good news rate cuts are in place.” Waller said he wouldn’t support lowering interest rates in March, but sees room to cut two, or possibly three, times this year. He admitted that there are early signs the economy could be slowing, but those aren’t yet borne out by the most-watched economic figures.