Trump continues to dampen risk appetite 

Steel and aluminum tariffs in place; outlook remains clouded

After almost two months in office, US President Trump remains the biggest risk factor. His inconsistent tariff strategy and fierce rhetoric continue to cast a shadow over markets, particularly US equities. Following a dreadful session on Monday, when risk appetite took another significant hit, hopes for a small rally in stocks yesterday quickly faded, as Trump once again managed to confuse market participants with his ‘stop-and-go’ tariff stance.

Specifically, the 'cat and mouse' game with Canada continued. Trump once again tried to corner America’s neighbour by bumping the steel and aluminum tariffs on Canadian imports to 50%, only to back down after Ontario’s Premier suspended the announced energy price hikes. While the much-touted 25% tariffs on steel and aluminum imports have started, it’s anyone’s guess if these tariffs will be maintained, if there will be exemptions applied, and whether these tariffs could again be postponed until April 2.

Consequently, US stock indices remain on the back foot, with the Nasdaq 100 index leading the sell-off this week. Meanwhile, the dollar has been trying to recover from last week’s abysmal performance. Despite the progress made in the US-Ukraine-Russia talks in Saudi Arabia boosting the euro, the greenback has recorded some gains against other major currencies.

US CPI report in the spotlight

Amidst these conditions, February’s US inflation report will be released today, one week before the March 19 Fed meeting. Economists are currently forecasting a small deceleration in both the headline and core indicators to 2.9% and 3.2% year-on-year increases, respectively, which are below their January figures.

The recent Prices Paid indices of the two key ISM surveys and the current upward trend in the Producer Price Index, which is assumed to lead CPI by 3-7 months on average, have increased the possibility of an upside surprise today. On the flip side, oil prices dropped by 11% in February on an annual basis, which, compared to the modest 2% jump in February 2024, could result in a downside surprise.

The market is currently pricing in 77bps of rate cuts in 2025, with the first move expected in June. Given the continued weakness in US stocks and growing worries about a US recession, a soft inflation report today could open the door to dovish Fed rhetoric at next week’s meeting. On the contrary, another solid inflation report could reinforce the hawks’ concerns that inflation might be on the cusp of a new uptrend. Such an outcome could prove damaging for risk sentiment but somewhat boost the dollar.

The US CPI report will be released at 12:30 GMT. One would expect Trump to remain quiet ahead of the release, but then take a more aggressive stance once the figures are out. Regardless of the outcome, Trump will probably criticize the Fed for keeping rates too high and choking US growth.

BoC expected to cut rates by 25bps

The latest developments will most likely force the BoC to cut rates for the seventh consecutive time. Recent data mostly support another rate cut, as the February employment figure was disappointing and inflation remains close to target, but the BoC’s main concern is the worsening trade relationships with the US.

While the big question ahead of the meeting is whether the BoC would opt for a hawkish or dovish cut, the latter option seems to be a one-way street for Macklem et al. As such, a dovish rate cut could act as another loonie headwind, while a less probable hawkish cut is not expected to benefit the loonie much at this stage.

Yen loses ground but wage agreements should satisfy the BoJ

Despite the yen surrendering a small portion of its recent gains versus the dollar, the newsflow from the wage negotiations appears to be positive. The big car conglomerates have announced their wage increase agreements, with the focus now shifting to Rengo, which is Japan's largest labour union. The BoJ is probably satisfied with progress on the wages front, gradually opening the door to a slightly more hawkish meeting next week.