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Daily Economic Update
04.03.2025US: Trump hits Canada and Mexico with 25% import duties, and China an additional 10%, as threatened previously. Dashing hopes of a last-minute deal, President Trump imposed 25% tariffs on most goods imports from Canada and on all goods from Mexico while raising tariffs on all Chinese goods by a further 10% (on top of 10% he levied in February) effective today, as he had stated last week. The President, citing insufficient progress on curbing drug trafficking and illegal immigration along with these partners’ high trade surpluses, stated that there was “no room left” for further negotiations with Canada and Mexico. Fears of an escalating trade war took a step closer to being realized with Canada retaliating with 25% duties of its own on US goods (worth $21bn) effective today in the first step and pledging to hit $85bn more goods with similar tariffs in the next three weeks. China also retaliated by levying up to 15% tariffs on some US agricultural imports in addition to taking other non-tariff retaliatory measures. For now, there hasn’t been much reaction from Mexico. Following the announcements, US stocks saw a sharp sell-off, with S&P 500 closing 1.8% down on Monday, while UST 10Y yields dropped by around 5 bps to 4.18% amid mounting growth worries. Most Asian equity markets also opened deep in the red this morning but pared losses on seemingly less aggressive countermeasures by China.
US: Expansion in manufacturing activity nearly halts, with details more adverse. The ISM manufacturing PMI fell more than expected to 50.3 in February from January’s 50.9, with the new orders index swinging back to contraction (48.6) after three straight months of expansion as businesses’ mood worsened amid tariff implications and resulting worries of higher input costs. The gauge of prices jumped to its highest since June 2022 to 62.4 from 54.9 in January, while the employment subindex slumped back to 47.6 from January’s eight month high of 50.3. The initial euphoria post-presidential election seems to be now fading, with businesses and consumers becoming more downbeat amid a cloudier economic environment and a volatile government policy outlook. Markets also raised bets for more Fed interest rate cuts, seeing higher chances of three 25 bps cuts for this year as growth momentum increasingly falters despite worries of tariff-induced higher prices.
Eurozone: Inflation slows to 2.4% in February. CPI inflation in February slowed to 2.4% y/y from January’s 2.5% reading, but beat market expectations of 2.3%. Core inflation (excluding food and energy prices) also decreased, falling from 2.7% y/y in January to 2.6% in February, its lowest in more than three years. Furthermore, stubbornly high services inflation also appears to be on a downward trend, decreasing for the second consecutive month and falling to a ten-month low of 3.7% (3.9% January). The slowdown in underlying price pressures could strengthen the ECB’s resolve to lower borrowing costs further, and it is widely expected that the ECB will cut rates by another 25 bps at its policy meeting this Thursday.
Oil: OPEC+ to proceed with planned output hikes in April. Despite rising uncertainty about the global economy, OPEC+ announced yesterday that it would commence unwinding its 2.2 mb/d of voluntary supply cuts in April as planned. The eight members participating in voluntary cuts since January 2024, including Saudi Arabia, Kuwait, the UAE and Russia, will increase crude production by 138 kb/d collectively every month until September 2026, after which all 2.2 mb/d of withheld supply should have been restored. The decision, which OPEC+ explained as being driven by “healthy market fundamentals and positive market outlook”, took the market by surprise, with oil prices (Brent) dropping 2.2% yesterday and a further 0.9% in Asian trading this morning to just under $71/bbl. Some market observers and participants are also interpreting the announcement as OPEC bowing to pressure from the Trump administration to increase supply in order to offset anticipated shortfalls in Iranian flows due to the ratcheting up of US sanctions on the Islamic Republic. The reality is likely more nuanced than that, but OPEC+, in its deliberations, will likely have placed more stock in the fact that inventory levels and oil time spreads are not signaling oversupply at this juncture. Nevertheless, to assuage market worries that the decision could compound the expected oversupply amid soft oil demand, the group did reiterate that these gradual monthly increases may be paused or reversed if market conditions deteriorate and requested that members participating in compensatory cuts (for overproducing on quotas), such as Iraq and Kazakhstan, front load their deeper cuts. Therefore, the actual volume of crude coming to the market from April should be below 138 kb/d. OPEC+ is expecting updated compensation plans from these overproducing members by the 18th of March.
Kuwait: Non-oil private sector PMI softens in February. The non-oil, private sector PMI activity gauge moderated to 51.6 in February from 53.4 in January, signaling continued expansion but at the slowest rate since last September. The index remains well above its historic average of 48.7, however. While the output component remained in growth territory in February, it decelerated for the third consecutive month, indicating a loss of momentum in business activity. New orders expanded at a softer pace, though firms noted demand resilience helped by advertising and discounting strategies. Export orders grew, albeit at the slowest rate in 18 months, suggesting external demand headwinds. Notably, employment contracted for the first time in six months, accompanied by a decrease in staffing costs. Meanwhile, firms faced intensifying cost pressures as input prices rose sharply, driven by higher purchasing prices for items including advertising, food products, and transportation. Nevertheless, competitive pricing by firms inhibited cost transfers to end consumers as output prices fell.
Saudi Arabia: Non-oil PMI eases but remains high. The non-oil private sector PMI eased to 58.4 in February from a decade high reading of 60.5 in January, though still reflects robust expansion in business activity. Growth in the output and new orders components eased from an exceptionally strong level in January, but continued to signal solid expansion. Despite the slower growth, employment rose at the fastest rate in more than a year, as business confidence about future demand strengthened to a 15-month high. On the prices front, higher material prices and wages continued to push input costs up, but the rise in selling prices was modest due to ongoing competition among firms.
Egypt: Non-oil private sector saw continued improvement in February. Private sector activity in Egypt notched up its first back-to-back expansion in February in over four years. The S&P Global Egypt PMI came in at 50.1 in February, dipping from 50.7 in January, but nevertheless remaining above the neutral 50.0 mark, which signals ongoing recovery. New orders grew for the second consecutive month, though at a slower pace, dragged down by manufacturing. Firms increased input purchases at the sharpest rate in 3.5 years, yet employment declined due to hiring challenges. Price pressures remained mild, with input costs rising slightly due to a strong US dollar, but wage costs declined. Selling prices increased gradually, implying limited pass-through from higher costs. Despite rising demand, firms remained cautious and business optimism eased to its lowest since November.