CHINA: Country Wrap:  Economic Targets Realistic. 

Mexico and Canada are highly exposed to the US and have reached deals to delay 25% tariffs by 30 days. China didn’t come to an agreement and a 10% trade tax has been imposed on all US imports from China. It has retaliated with export controls on certain minerals, an anti-trust investigation into Google, and 10-15% tariffs on oil, coal, LNG and agricultural machinery imports from the US. The key though is that the US is less exposed to trade restrictions than all the regions it is targeting. 

• US goods exports account for around 7% of GDP compared with 26% for China & Canada and 20% for the EU. Mexico is a lot closer at 8%. Thus the US can weather a trade war better than the others.
• US merchandise exports to China account for around 7% of its total and only 0.5% of GDP. In comparison, China’s shipments to the US are worth over 14% of its exports and around 2.8% of GDP. Thus it is not surprising that China didn’t respond to the US’ universal 10% tariff with a universal tariff of its own.

US merchandise exports by destination % total 2024

• Around 13.5% of US imports are from China worth about 1.5% of GDP. Mexico and Canada together are around 28% of imports and over 3% of GDP. Again it is not surprising that the latter could find common ground with the US and that the US felt it didn’t have to form a deal with China. While a 10% tax on Chinese imports will lift prices, particularly in certain sectors, overall it is less likely to be an issue for the US economy than 25% on NAFTA members.
• Just under 20% of US imports come from the EU worth 2% of US GDP and 18% of US exports go to the region worth 1.3% of GDP. There is likely room to negotiate a deal with the EU too.

US merchandise imports by source % total 2024

Source: MNI - Market News/Refinitiv

The USD index sits close to session highs at the time of writing. The USD BBDXY index is above 1310, as seemingly no deal has been reached to delay the US tariffs on China imports. China has just announced counter tariffs of its own and also announced an anti-trust probe into Google. This includes 10% tariffs on oil and agricultural machines from the US and 15% on US LNG and coal exports. These will come into effect on Feb 10 per the China FinMin. 

• AUD and NZD are both down over 0.70%, although up slightly from lows seen post tariff headlines. AUD/USD was last 0.6180, session lows rest at 0.6171. For NZD/USD we are just under 0.5590, while EUR is down by 0.60%, to 1.0275/80. We are still also above Monday intra-session lows.
• USD/CNH got to highs of 7.3365, but sits back under 7.3300 in latest dealings.
• USD/JPY has fallen back to 155.00, as risk aversion in the equity space (US futures back into the red, after spending much of the day in positive territory). Regional equities are still mostly in the green, but off best levels for the session.
• The latest risk off move have seen us tsys yields now trade little changed for the session after initially rising 1-2bps. The 10yr yield was last -.0.8bps at 4.547%.
• Looking ahead, the US response will be gauged to China's tariff hikes. Note we also have: Fed’s Bostic and Daly speak later and US December JOLTS job openings and orders print. France’s December budget statistics and January Spanish unemployment are also out.

JGB futures are sharply weaker, -27 compared to the settlement levels, but slightly above the session low set early in the afternoon session.

• BoJ's Ueda said on Tuesday the central bank will aim to achieve 2% inflation, as measured by the overall consumer price index, on a sustained basis. In gauging whether inflation will sustainably hit its target, the BoJ focuses on underlying inflation or the broad trend of price moves that strips away one-off factors such as fuel and volatile fresh food costs. (per RTRS)
• Cash US tsys are little changed in today’s Asia-Pac session after yesterday’s modest sell-off following news that President Trump agreed to delay a 25% tariff on Mexico and Canada.
• Cash JGBs are flat to 2bps cheaper across benchmarks. The benchmark 10-year yield is 1.5bps higher at 1.267% after setting a fresh cycle high of 1.275% after today’s supply.
• The 10-year JGB auction delivered mixed results, with the low price beating expectations but the cover ratio declining to 3.1809x from 3.3570x at the previous auction. The tail also lengthened slightly to 0.03 from 0.01.
• Swap rates are 1-3bps higher. Swap spreads are mostly wider.
• Tomorrow, the local calendar will see Labor & Real Cash Earnings and Jibun Bank Composite & Services PMIs.