- Trump emphasized his plans to impose heavy duties on Canada and Mexico.
- The US Central Bank kept interest rates unchanged, as expected.
- US data on Thursday revealed that the economy expanded by 2.3% in the fourth quarter.
Interest futures eased on Friday as the dollar, and Treasury yields climbed after Trump emphasized his tariff plans. Meanwhile, market participants remained cautious ahead of a crucial US inflation report that will shape the outlook for monetary policy.
The bond market paused its recent rally as investors feared a longer period of elevated interest rates in the US. Since 15th January, interest futures have gained as yields paused this year’s rally. The pause became clearer when Trump took office and failed to deliver on proposed tariffs. The uncertainty surrounding his policies has led many to believe he will take a soft approach. However, on Thursday, Trump emphasized his plans to impose heavy duties on Canada and Mexico, rekindling fears of high interest rates.
Tariffs on imported goods will increase local production, boosting the US economy. At the same time, consumer spending on local goods will increase, translating to a spike in inflation. This might force the Fed to keep rates at restrictive levels.
After 100-bps of rate cuts last year, Fed policy diverged from most of its peers. While other major central banks are forecasting more rate cuts this year, borrowing costs in the US could remain high for longer. Additionally, analysts predict more pauses like the one in January, which could keep Treasury yields elevated and interest futures low.
However, tariffs might also cause trade wars that would hurt all economies involved. Such an outcome would dampen risk appetite, pushing investors to the safer bond market.
US GDP (Sources: Reuters, Bureau of Economic Analysis, LSEG)
Elsewhere, US data on Thursday revealed that the economy expanded by 2.3% in the fourth quarter. This was well below the forecast of 2.7%. Nevertheless, the same report showed a surge in consumer spending, indicating resilience. Economic data will continue shaping the outlook for US monetary policy.
The next major report will show the state of underlying inflation. The core PCE price index, due on Friday, might reveal a 0.2% increase compared to the previous reading of 0.1%. Higher-than-expected inflation will weigh on interest futures by lowering Fed rate cut expectations. On the other hand, soft figures will give policymakers more confidence to cut interest rates, boosting prices.
