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Last week, Trump announced a 25% tariff on automobiles, semiconductors, and pharmaceuticals, while the latest University of Michigan Consumer Sentiment report showed that long-term inflation expectations surged to the highest level since 1995, reigniting market uncertainty over inflation. Although this boosted defensive sector stocks, the S&P 500 ultimately declined by 1.61% to close at 6,013.12 due to pullbacks in other sectors.
In the bond market, despite the sharp rise in long-term consumer inflation expectations, the FOMC meeting minutes hinted at a potential pause in balance sheet reduction, easing concerns about liquidity shortages. This led to a decline in both short- and long-term U.S. Treasury yields, while the dollar index also edged down to around 106.6.
Key Economic Data Last Week
FOMC Meeting Minutes: In the January minutes, Federal Reserve officials noted that core PCE had shown a significant decline when viewed on a three- to nine-month annualized basis. However, some officials emphasized that additional data would be required to confirm that inflation had sustainably returned to the target range.
Most officials believe that the balance of risks is now largely neutral, but policy shifts, geopolitical uncertainty, and stronger-than-expected consumer spending could all pose upside inflation risks. Moving forward, distinguishing whether inflation fluctuations are temporary due to new government policies or indicative of a long-term trend shift will become more challenging.
On monetary policy, concerns about potential fluctuations in reserve levels due to the debt ceiling issue could complicate assessments of market liquidity. As a result, pausing or slowing balance sheet reduction until the debt ceiling situation is resolved may be an appropriate course of action.
Japan’s Exports: The exports grew 7.2% YoY (prior: 2.8%) in January, slightly below market expectations of 7.6% but still marking the fourth consecutive month of growth. In terms of product composition, transportation equipment was the primary driver of export growth, with automobile exports rebounding significantly, posting a YoY increase of 10.5% (previous: -5.9%), contributing 1.7 percentage points to overall export growth.
Looking at regional performance, exports to China continued to weaken, declining by -6.2% YoY (prior: -3.0%). Semiconductor component exports to China fell sharply by -13.6% YoY (prior: 6.4%), while semiconductor manufacturing equipment exports plummeted by -20.8% YoY (prior: -10.4%), likely reflecting Japan’s continued alignment with U.S. restrictions on semiconductor exports to China.
Conversely, exports to the U.S. rebounded by 8.1% YoY (prior: -2.1%), with automobile exports reversing prior weakness and surging 21.8% YoY (prior: -6.8%). This suggests that, under the looming threat of Trump’s tariffs, U.S. demand for automobiles may have been pulled forward.
Japan’s Q4 GDP was primarily driven by substantial growth in net exports, and with automobiles being Japan’s largest export category—particularly to the U.S.—if the U.S. implements tariffs on automobiles and semiconductors as early as April, it could pose a significant risk to Japan’s automotive sector and overall economy.
Japan CPI: CPI rose 4.0% YoY (prior: 3.6%) in January, surpassing 4% for the first time in nearly two years. Core CPI increased to 3.2% YoY (prior: 3.0%), marking the highest level since June 2023, while core-core CPI (excluding fresh food and energy) rose to 2.5% YoY (prior: 2.4%).
The primary driver of this increase was rising food prices. Fresh food prices soared 21.9% YoY (prior: 17.3%), reaching a 20-year high, while rice prices continued to set record highs, surging 70.9% YoY (prior: 64.5%), pushing overall grain prices up to 18.4% YoY (prior: 15.2%).
Despite persistently high inflation weighing on real wage growth, expected outcomes from annual wage negotiations could support the Bank of Japan’s desired “virtuous cycle” of wage and inflation growth. The preliminary results of the Shunto wage negotiations, set to be released next month, will likely play a crucial role in determining the BOJ’s next rate hike timing.
Key Economic Data This Week
US PCE（2/28）: Although January CPI came in higher than expected, the Cleveland Federal Reserve projects that January PCE inflation will ease to 2.51% YoY (prior: 2.55%), with core PCE expected to reach 2.66% YoY (prior: 2.79%), reflecting the impact of high base effects in Q1 and continued downward pressure on global oil prices.
China PMI（3/1）: With the end of the Lunar New Year holiday and businesses resuming operations, the manufacturing PMI is expected to rebound to 50.0 (prior: 49.1), while the services PMI is projected to hold steady at around 50.3 (prior: 50.2).
