Ahead Today
G3: ECB Deposit Rate Decision, US Housing Starts, US Initial Jobless claims
Asia: Bank of Korea policy rate
Market Highlights
Fed Chair Powell struck a somewhat hawkish tone by saying that the central bank must ensure that tariffs don’t trigger a more persistent rise in inflation, to “make certain that a one-time increase in the price level does not become an ongoing inflation problem”. These hawkish comments were interesting as they showed some divergence within the FOMC, with Governor Waller for instance saying that the one-off price increase from tariffs should ultimately mean a sharper slowdown in growth and as such more space for rate cuts in time to come. Equity markets fell with Chair Powell’s comments coupled with the recent curbs on Nvidia chips to China, although US rates markets interestingly did not move too much on the back of Fed Chair Powell’s remarks.
Meanwhile, Bloomberg news reported that China wants to see a number of steps from President Trump’s administration before it will agree to trade talks, including showing more respect by reining in disparaging remarks by members of his cabinet, a more consistent US position, coupled with a willingness to address China’s concerns around American sanctions and Taiwan. In addition, Beijing also wants the US to appoint a point person for talks who has the president’s support and can help prepare a deal that Trump and President Xi Jinping can sign when they meet.
It remains to be seen whether the existing gulf in expectations between the two powers will be met, with the White House Press Secretary stating Trump’s expectations for China to make the first move as China “needs to make a deal with us”.
We note that by many respects, the US is much more dependent on China’s exports, than China is on US exports, although there is no doubt a negative impact on both sides from a tariff and trade war.
Our calculations show that for a meaningful 40% of US total imports from China, China fulfils >70% of US imports for that product. This similar number is just a miniscule 3% for the US.
To make it more salient, for key products such as smartphones, US imports 76% of its supply from China, while China has a 70% global export market share of that product. Likewise, US imports 88% of Christmas decorations from China with China having a significant 89% global export market share. So in short, who really holds the cards remains to be seen
Regional FX
Overall, risk sentiment was somewhat negative with equity markets falling while Asian currency performance was mixed. USD/CNH remained around 7.300 levels, while the likes of KRW (-0.3%) and SGD (-0.15%) underperformed. The Bank of Korea will announce its policy decision later today, with the consensus calling for a hold albeit with split expectations with 10 out of 24 economists expecting a 25bps cut. Overall, while BOK may choose to take a wait and see approach this meeting, the overall bias for policy rates are for them to head lower in our view, given the negative growth and export impact from tariffs, and also soft domestic demand due to current political uncertainty. We forecast another 75bps of rate cuts by the BOK through 2025, bringing the BOK rate to 2% from 2.75% currently.
