Tariff Man in Motion

Welcome back to SovereignBeat!

• US Inflation Hits 2.8% while Fed is Puzzled with the Neutral Rate

• Yields Plunge After Bessent Appointment

• Tariff Man Threats BRICS, Canada, and Mexico

• Dow and S&P Soar to Record Highs

• Oil Prices Slide Under Pressure From Supply Glut

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: Last Tuesday, the FED released the minutes from the November 7 Federal Open Market Committee meeting. Policymakers suggested that if economic data continues to meet expectations—specifically with inflation moving steadily toward the 2% target and the economy remaining near maximum employment—it would be appropriate to gradually transition to a more neutral monetary policy stance over time.

• At the same time, policymakers emphasized the uncertainty surrounding the neutral interest rate—the rate that supports a country's economy at full employment and stable inflation but neither stimulates nor slows economic activity—as a key factor in their cautious approach. While estimates of the neutral rate have increased over the past year, there remains ambiguity about how current rates compare to this level. These uncertainties complicate the assessment of the current restrictiveness of monetary policy, reinforcing the need for a measured approach.

• Recent progress in reducing inflation appears to have stalled, as shown by last week’s reading of the Federal Reserve's preferred inflation measure published on Wednesday. The Personal Consumption Expenditures (PCE) Index rose at an annual rate of 2.3% in October, up from 2.1% in September. Core PCE, which excludes food and energy, climbed to 2.8% from 2.7% the prior month. On a three-month annualized basis—core PCE also increased by 2.8%.

• These figures align with recent Fed commentary suggesting no urgency to cut rates while the labor market remains robust and economic growth continues. The rise in inflation was driven by service prices, particularly a spike in portfolio management fees amid a stock market rally. Core services prices (excluding housing and energy) jumped 0.4% month-over-month, the largest increase since March, while core goods costs remained flat.

• Yields on U.S. government bonds dropped significantly over the week following President-Elect Donald Trump's announcement of Scott Bessent as the next Treasury Secretary. The 10-year U.S. Treasury yield closed at 4.18% on Friday, down from 4.42% the previous week and a recent intraday high of 4.50% on November 15. The yield on 2-year declined by more than 20bps to 4.16%.

• The US Dollar Index (DXY) fell below 105.8 on Friday, heading for a weekly loss of around 1.65%—its first decline in nine weeks. Markets are now pricing a 66% probability of a 25 bps rate cut in December, up from 55.9% the previous week.

• A monthly labor market report, set for release on Friday, will reveal whether the recent deceleration in U.S. job growth continued into November. In October, the economy added only 12,000 jobs, a sharp decline from the robust gain of 254,000 in the previous month and the smallest increase since December 2020. Meanwhile, the unemployment rate in October remained steady at 4.1%.

• EU: Annual inflation in the eurozone accelerated for the second consecutive month in November, rising to 2.3% from 2.0% in October, as last year's energy price declines are no longer factored into the annual rate calculations. However, underlying inflation unexpectedly eased, with service prices edging down to 3.9% from 4.0%, and core inflation (excluding food, energy, alcohol, and tobacco) holding steady at 2.7%. Markets anticipate a rate cut from the European Central Bank next month, though the size of the reduction remains uncertain, as fears of a much higher inflation reading in November did not materialize, leading markets to increase the probability of a larger 50bps cut.

• Japan: The yen strengthened to below 150 against the USD, rebounding from the JPY 154 range last week, driven by its safe-haven appeal and a stronger-than-expected domestic inflation report. The Tokyo-area core CPI, a key predictor of nationwide trends, rose 2.2% year-on-year in November, beating expectations and climbing from 1.8% in October. This fueled speculation about the timing of the Bank of Japan’s next rate hike, with forecasts split between December and January.

• In fixed income, the 10-year Japanese government bond yield dipped to 1.04% from 1.08% the previous week, remaining near its 13-year high amid BoJ rate hike anticipation. Governor Kazuo Ueda reiterated that rates would rise if the economy and inflation align with central bank projections.

Equity Markets

• US: All major U.S. stock indexes gained over 1% in the holiday-shortened trading week, with Dow gaining more than 2.3% and building on the prior week’s momentum. Both the S&P 500 and Dow reached new record highs last week, while the NASDAQ remained just below its peak from three weeks ago.

• In November, U.S. stock indexes posted their sixth gain in seven months, recovering from October's modest decline. The Dow surged 7.5%, the NASDAQ rose 6.2%, and the S&P 500 gained 5.7%.

Commodity Markets

• Oil: Brent crude oil prices dropped to approximately $72 per barrel after an unexpected increase in US gasoline inventories. Investors are now waiting for the upcoming OPEC+ meeting, amid speculation that the planned January production hike could be postponed due to oversupply and sluggish demand. Meanwhile, geopolitical uncertainty lingers despite a ceasefire between Israel and Hezbollah.

In Motion

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Trump and Tariffs

• President-elect Donald Trump caused a stir on Tuesday with a Truth Social post announcing plans to impose a 25% tariff on imports from Mexico and Canada and an additional 10% tariff on goods from China. He stated that these tariffs would remain in place until the flow of drugs, particularly fentanyl, and migrants into the U.S. was controlled.

• Mexican President Claudia Sheinbaum responded, warning that Mexico would retaliate if Trump implemented the tariffs. She noted that such a move could cost 400,000 U.S. jobs and drive up consumer prices, given the importance of Mexico’s automotive industry, which accounts for nearly 25% of North American vehicle production, primarily for the U.S. market. The tariffs could eliminate profits for major U.S. automakers, including Ford, General Motors, and Stellantis. Many analysts view Trump's tariff threats as negotiating tactics rather than firm trade policies.

• China also criticized Trump’s proposal to impose new tariffs on its goods over fentanyl-related issues, arguing that it unfairly shifts responsibility for the U.S. opioid crisis. Analysts suggested that Trump’s tariff strategy appears aimed at achieving goals beyond trade.

• Later, on Saturday, Trump issued another post on Truth Social, warning BRICS nations against de-dollarization efforts. He demanded a commitment from BRICS countries to refrain from creating a new currency or backing alternatives to the U.S. dollar, threatening 100% tariffs and loss of access to the U.S. market if they failed to comply.

• During his campaign, Donald Trump pledged a 60% tariff on China and last week escalated with threats of 10% and 100% tariffs, citing fentanyl flows and de-dollarization efforts by the US main geopolotical and economic rival (China is a BRICS member). It remains unclear which tariff rates will ultimately be implemented on China. It is also likely that goods where China holds a near-monopoly, such as critical minerals, may be exempt from tariffs to mitigate inflationary and supply chain risks.

• BRICS countries would face major hurdles in abandoning the US Dollar, even if they wanted to, due to $12 trillion in USD-denominated debt held by entities outside the U.S. This debt underpins global trade and financing, as businesses require USD to operate and sell in this currency. Defaulting on USD debt isn't a viable solution, as it would destroy trust and deter future business. The Eurodollar system's massive debt reliance makes a transition from the Dollar a lengthy process, far exceeding Trump’s 4-year presidency. However, tariffs will undoubtedly accelerate efforts by countries to seek alternative capital markets and reduce dependencies.

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• Why This Time Really Is Different (Bloomberg)

• Ukraine’s Former Foreign Minister Dmytro Kuleba’s FT Lunch (FT)