Steelers Get The W

By Benjamin Picton of Rabobank

As I write this Daily it is Monday morning here in Sydney, but Superbowl Sunday in the USA. The Kansas City Chiefs are taking on the Philadelphia Eagles, but the real winner on the day may be the steelers. Not the Pittsburgh NFL franchise, but the steel workers of the United States who Donald Trump has just pledged to protect via a fresh round of import tariffs.

Speaking aboard Air Force One on his way to the big game, Trump said that he will be announcing 25% tariffs on steel and aluminium imports on Monday. Of course, we’ve heard this tune before and some previous tariff announcements (the ones on Mexico and Canada, for instance) have yet to be enacted, but the markets aren’t judging Trump’s comments as an incidence of him crying “wolf!” this time around. Nevertheless, Sectoralists will be shouting “see!”, while economic Rationalists murmur reassurances to themselves of an imminent back-down, and hope that input prices aren’t about to rise (again).

USDCAD has leapt 68pips since the open to be up 0.47% (Canada being a major exporter of aluminium to the USA), the AUD is down 0.41% (Australia’s third-largest company being a major exporter of Canadian aluminium to the USA) and EURUSD is down 0.32% in early trade. Liquidity is thin this time of a Monday morning, but even so the EUR usually doesn’t move much in this timezone. So, this kind of price action is certainly eye catching.

Aussie and Kiwi bonds are both seeing yields jump, despite drifting lower over the course of last week as the antipodeans approach central bank meetings where both are expected to cut policy rates. Crude oil prices rose on Friday but still finished in the red for the week. Brent is dealing at $74.76/bbl while WTI is seeing a little more upward momentum this morning to change hands at $71.12/bbl. Spot gold is again threatening new highs at $2,870.

The release of the January US non-farm payroll report on Friday confirmed employment growth of just +143,000 in the month. That was a little more than one standard deviation below the median estimate on the Bloomberg survey of +175,000, and below the average pace of job creation in 2024. The soft employment growth figure seemingly confirms the signal from JOLTS and jobless claims earlier in the week that gave the impression of a cooling labor market.

However, the payrolls report wasn’t all bad news. The unemployment rate (measured by the Household Survey) unexpectedly fell from 4.1% to 4% even as participation lifted by one-tick and average hourly earnings exceeded the 3.8% estimate to leap by 4.1% year-on-year. Stronger earnings growth might have been flattered somewhat by a decline in average hours worked, which in turn may been muddied somewhat by the influence of the California wildfires. The two-month net payroll revision saw estimates of prior job creation bumped up by an extra 100,000 positions.

Nevertheless, USDJPY reacted negatively to the release and experiencing sustained selling that got a second wind when the University of Michigan consumer sentiment report dropped a few hours later. That report showed declining optimism on the ‘current conditions’ and ‘future expectations’ indices, while 1-year ahead inflation expectations leapt from 3.3% previously to 4.3%! With gold prices pumping higher and tariffs incoming, perhaps we’re about to start hearing more about ‘stagflation’ in the months ahead?

Of course, there’s always the chance that stagflation will be staved off by promised tax cuts and that we just end up with the “’flation” part and higher-for-longer policy rates. Trump has dangled the idea that tariffs (the most beautiful word in the dictionary) might pay for cuts to income taxes, but that only works if the tariffs are actually imposed. Merely threatening tariffs and watching on in amusement as international counterparts jump to comply won’t do the trick.

Unfortunately, tariffs might not do the trick either. The USA (and pretty much everyone else) used tariffs to fund the functions of government prior to WWI, but government accounted for a far smaller share of GDP and the welfare state was virtually non-existent at the time. Today, entitlements (that Trump has promised not to cut) make up almost two-thirds of all federal spending while defense (which Trump wants to spend more on) makes up 15% and debt servicing costs make up 13%. Even with Elon Musk and his team at the DOGE furiously cutting away, the math ain’t mathin’.

One possible outcome is for a kind of ‘worst of all worlds’ financial repression scenario where income taxes don’t get cut and US consumers contribute more via tariffs and the stealth tax of inflation. Defense costs could be ameliorated by forcing allies (like NATO) to either buy more US hardware or buy WAY more US Treasuries (or both) to keep the funding costs low. Wall Street banks have been hopeful that the Trump Administration might provide some relief from capital requirements, perhaps that arrives via more generous capital treatment of Treasury bond holdings to encourage more buying? Perhaps FIs might be told to hold more Treasuries for reasons of liquidity?

Secretary of State Marco Rubio and Defense Secretary Pete Hegseth have obviously paid some thought to these problems of how to fund the US military without raising taxes or cutting social spending. Rubio recently pointed to the AUKUS agreement struck between the USA, UK and Australia as “almost a blueprint” for how the Trump White House would like to engage with allies. While meeting with Aussie Defence Minister Marles over the weekend, Hegseth confirmed that Trump is “very aware” and “supportive” of the terms of AUKUS.

That meeting was Hegseth’s first with a foreign counterpart and was timed to coincide with Australia making a $500m tribute payment under the agreement to help bolster US shipbuilding. The quid pro quo here is that the USA has agreed to provide Australia with second-hand nuclear-propelled submarines in the early 2030s, rotate US submarines through Aussie bases from 2027 and help Australia develop its own naval shipbuilding industry by sharing expertise on everything up to closely-guarded nuclear secrets (previously only shared with the UK).

Once again we emphasize that the market tail is being wagged by the geopolitical dog and that being the ‘tail’ involves tail risks. As Trump again today confirms that he is serious about the USA taking over Gaza and developing it into the “Riviera” of the Middle East, it is worth pointing out that having a land presence adjoining the Suez Canal is EXACTLY the sort of thing that Great Powers (Britain and France) used to be keen to do in previous periods of geopolitical competition.

This kind of thinking (the same thinking applied on Panama and Greenland) looked out of date the decades following the end of the first Cold War, but traders are now going to have to expand their reference period if they want to understand where the market could be heading in the years ahead.

So, US steelers may be getting the win tomorrow, but the free traders and long-term free-riders under the US defence umbrella look set to be losers.