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STIR: European Rates Underperformance With Tariff 'Reprieve'

STIR
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  • Today’s hawkish shifts in ECB pricing on Schnabel ("we are getting closer to the point where we may have to pause or halt our rate cuts") and less so for the BOE (headline CPI beat but core inline and services a tenth softer than expected) sees reasonable underperformance to US rates.
  • Looking over the next two years, Euribor implied yields are up to 6bps higher on the day, Sonia yields are 2.5bp higher for Dec’25 and 5.5bp for Dec’26 whilst SOFR yields are 0-1bp lower.
  • US President Trump’s latest threats late yesterday on large tariffs on autos (“in the neighborhood of 25%”) and pharmaceuticals & semiconductors (“25% and higher”), but importantly not effective until Apr 2, has seen a similar reaction to after Trump’s pre-reciprocal tariffs announcement on Feb 13.
  • That is the opposite of the US inflationary/European growth negative reaction seen on tariff-related headlines seen earlier in the Trump administration.
  • Lending weight to this tariff reprieve angle is the admittedly more limited underperformance of CAD rates on the day amidst no new material local headlines.
  • The right-hand chart below shows how the broader expectations of a significant increase in European defense spending has also helped drive a sizeable wedge in rate performance against the US since Trump’s reciprocal tariffs announcement last week. 
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  • Today’s hawkish shifts in ECB pricing on Schnabel ("we are getting closer to the point where we may have to pause or halt our rate cuts") and less so for the BOE (headline CPI beat but core inline and services a tenth softer than expected) sees reasonable underperformance to US rates.
  • Looking over the next two years, Euribor implied yields are up to 6bps higher on the day, Sonia yields are 2.5bp higher for Dec’25 and 5.5bp for Dec’26 whilst SOFR yields are 0-1bp lower.
  • US President Trump’s latest threats late yesterday on large tariffs on autos (“in the neighborhood of 25%”) and pharmaceuticals & semiconductors (“25% and higher”), but importantly not effective until Apr 2, has seen a similar reaction to after Trump’s pre-reciprocal tariffs announcement on Feb 13.
  • That is the opposite of the US inflationary/European growth negative reaction seen on tariff-related headlines seen earlier in the Trump administration.
  • Lending weight to this tariff reprieve angle is the admittedly more limited underperformance of CAD rates on the day amidst no new material local headlines.
  • The right-hand chart below shows how the broader expectations of a significant increase in European defense spending has also helped drive a sizeable wedge in rate performance against the US since Trump’s reciprocal tariffs announcement last week. 
image