The US government published the groundwork of its new trade policy

Markets

The US government published the groundwork of its new trade policy. The baseline is a 10% across‐the‐board levy on all imports, effective April 5th. The tariff rate is higher for countries who charge the US more than 20% (including FX manipulation and trade barriers; based on calculations by the US administration). In those cases, the US from now on charges discounted reciprocal tariffs (on top of existing tariff rates) amounting to approximately half of the tariffs charged to the US. In case of the European Union, the White House calculated an average 39% tariff rate charged to the US, translating into a discounted reciprocal tariff of 20%. The reciprocal tariffs take effect April 9th. Ahead of the announcement, Treasury Secretary Bessent told lawmakers that tariffs are a cap and that countries can take steps to push them down. However, the reference to “discounted” reciprocal tariffs suggests that the US government has leeway to move levels in both directions with the universal rate being a floor and the White House’s calculated tariff rate to the US (including FX manipulation and trade barriers) being the real cap (ie double the current discounted reciprocal tariff rate). It will be interesting to see whether and how fast the needle moves if countries threaten to retaliate. The EU for now framed it as “preparing for further countermeasures to protect our interests and our businesses IF negotiations fail”.

The initial market response is risk‐off with stock futures sinking 2%‐3% and core bond futures rallying. By keeping the threat of even higher tariff rates alive, we enter a prolonged period of uncertainty which can further damage (risk) sentiment. The new trade paradigm is expected to both raise inflation (short term) and hit growth (medium term). Up until now, the Fed prioritized upside inflation risks over downside growth risks. That’s still our main scenario, with Fed Chair Powell speaking about the economic outlook tomorrow evening. The market reaction is one with the onus on the “STAG” rather than the “FLATION” part of the story. It helps explaining new USD‐weakness, propelling EUR/USD from the 1.08 area to intermediate resistance (YtD top) at 1.0955. We still target a return to 1.1214. The trade‐weighted dollar (DXY; 102.80) already lost support (YtD low) at 103.20, paving the way for full technical retracement towards the 2024 low at 100.16. Risk‐off outweighs a 24% Japanese reciprocal tariff rate with USD/JPY falling from 149+ to 147. China gets slapped with an additional 34% rate on top of the 20% already in place, hurting CNY. USD/CNY rises from 4.27 to 4.2950, approaching the YTD high around 7.33 (weakest CNY‐levels since 2007). More short term volatility will obviously be name of the game with the dust still settling and awaiting the reaction function of nations and the US going forward from the current set‐up. In order to restore some market equilibrium, much will probably depend on how “final” current announced tariff rates are.

News and views

The National Bank of Poland yesterday left its policy rate unchanged at 5.75%. This level is still deemed conductive to meeting the NBP’s (2.5%) inflation target. However; the NBP acknowledged recent softer than expected inflation, even as inflation still remains elevated due to implemented increases in administered prices. Inflation in the first quarter was 4.9%, while the NBP expected it to peak at 5.4%. The NBP still sees wage growth running at a high level, but enterprise data point to lowering wage growth. Q1 activity also was weaker than expected. The NBP expects inflation to remain above the NBP target ‘in the coming months’ (was ‘this year’ in the March statement). In the second half of 2025 there will be a further rise in regulated energy prices. The NBP signals uncertainty on how ongoing high inflation will affect inflation expectations and wages. Despite the softer bias in the MPC statement, the Polish 2‐y swap yield rose marginally (4.85%). The zloty strengthened from the EUR/PLN 4.18+ area to close near 4.17. Recently some members opened the debate on the timing of a first rate cut. However, governor Glapinski didn’t see room for rate cuts anytime soon. He will address the press this afternoon.

US Senate Republicans published a budget blueprint that should lay the groundwork for the 2017 Trump tax cuts at about $4tn to be extend and include additional tax reductions of $1.5tn. The proposal also aims to raise the debt ceiling by $5tn. The proposal is planned to be presented for a vote later this week. It then still needs to be brought in line with a House proposal and while reaching an agreement on necessary spending cuts as well. The nonpartisan Committee for a Responsible Federal Budget estimates the Senate budget measure could add about $5.8tn to the US debt in the next decade.

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