(Opinions expressed are those of the author, a columnist for

Reuters.)

By Mike Dolan

LONDON, March 26 (Reuters) - What matters in U.S. and

global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial

Markets

The darkest U.S. consumer confidence outlook in 12 years is

sobering, to say the least, but the big question for investors

is whether consumers actually rein in spending to match their

apparent gloom.

Today, I'll discuss this, give you an update on what else is

happening in markets and then take a look at how much of next

week's potential U.S. tariff sweep is being priced into currency

markets.

Today's Market Minute

* The European Union's trade commissioner Maros Sefcovic met

with U.S. President Donald Trump's top trade officials on

Tuesday to try to avoid steep U.S. tariffs on EU goods next

week.

* The United States reached separate deals on Tuesday with

Ukraine and Russia to pause their attacks at sea and against

energy targets, with Washington agreeing to push to lift some

sanctions against Moscow.

* British finance minister Rachel Reeves is expected to announce

cuts to her spending plans on Wednesday in a bid to reassure

investors that she can be trusted to fix the public finances as

growth falters.

* The Bank of Japan must raise interest rates if persistent

increases in food costs lead to broad-based inflation, Governor

Kazuo Ueda said on Wednesday.

* China wields significant policy room to stimulate its economy

this year while some reform is needed to boost consumption,

Huang Yiping, an advisor to China's central bank, said on

Wednesday.

Consumer gloom or feint?

With the fog thickening over next week's big U.S. tariff

announcement, financial markets are mostly in a holding pattern

as the final week of a volatile first quarter limps to a close.

But the jury is still out on how the real economy is

absorbing the prospect of a global trade war.

On Tuesday, the Conference Board's March consumer survey

more than matched the worrying University of Michigan's version

for this month. Overall sentiment dropped to its lowest since

2021, and short-term expectations came in at their weakest since

2013.

The latter reading - which reflects the short-term outlook

for income, business, and labor market conditions - is typically

consistent with a wider economic downturn.

But like so many economic signals of late, this one wasn't

entirely negative. The so-called labor market differential,

derived from data on respondents' views on whether jobs are

plentiful or hard to get, actually ticked up, indicating a

still-robust employment picture.

Markets now have to wait to see whether hard data on actual

spending shows a pullback commensurate with the drop in

confidence. Investors have taken something of a jaundiced view

of surveys recently because the results have not yet been

matched by real world activity.

On the trade front, it's still not entirely clear which U.S.

tariffs are coming next week, with multiple 'ifs' and 'buts'

being put forward as last minute talks continue.

Wall Street stocks ended mixed on Tuesday. Tech stocks

outperformed again, but the S&P 500 barely eked out a

gain. Futures are back slightly in the red today.

Treasury yields were steady this morning after a

sharp retreat backed by Tuesday's dour confidence report and the

decent 2-year note auction. The dollar index was flat.

Overseas stocks were also a mixed bag on Wednesday, with

European and mainland Chinese stocks in the

red but Hong Kong and South Korea up.

Chinese markets and the yuan were sideswiped by news

that the U.S. added six subsidiaries of China's leading cloud

computing and big data provider Inspur Group to the U.S. export

restriction list along with dozens of other Chinese entities.

But the offshore yuan's drift to three-week lows is still

mostly down to tariff trepidation and expectations of further

domestic credit easing in China.

In Europe, the big set piece of the day is Britain's latest

government budget and forecasting update, which gilt markets

have been awaiting with some anxiety. However, both UK bond

yields and sterling slipped today after news of a surprising

drop in UK inflation last month.

Now, let's stay in the FX markets and consider what may or

may not be priced in ahead of next week's big U.S. tariff

announcement.

FX markets still suspect Trump is bluffing

It's been a lousy start to the year for Wall Street, but any

notion that a global trade war is fully priced by investors

seems fanciful. Just look at currency markets.

If you've lost track of what the U.S. administration's trade

plan is currently, then rest assured that you're not alone.

President Donald Trump's strategy ebbs and flows by the day

amid periodic insistence that every country is going to pay,

only to revert to seemingly random exclusions or added

complexity via sectoral and national caveats.

Slightly punch drunk, financial markets have reverted to

behaving like a metronome: "risk on" with any suggestion that

Trump is hesitating and "risk off" with every social media post

calling for blanket U.S. trade retribution.

As it stands, the latest nods and winks suggest the

momentous April 2 announcement will be messier than first billed

- and the pressure on stocks and bond yields has lifted a bit to

reflect that. Whether the administration's more equivocal stance

is a result of the market's tantrum in recent weeks is an open

question.

But it's anyone's guess what measures will eventually show

up and it's a pretty safe bet that whatever is announced will

not be the end of it.

So is the trade war risk fully priced in? How could it be?

MODELLING THREATS

Barclays FX strategist Themos Fiotakis and team have been

brave enough to attempt to build a framework showing how

currency markets might react in a full trade war scenario. And

they reckon very little of the outsize risk is currently priced

into foreign exchange rates, either from tariffs already

announced or from those coming down the pike.

The Barclays model works off the basic idea that tariffs

will inflate the globally-cleared price of imports in the U.S.

and that the dollar should nominally appreciate to offset the

resulting real exchange rate effects.

They judge the extent to which it has done so since Trump

was elected for a second term last year by the size of moves

since then that cannot be explained by economic considerations

embedded in interest rate differentials.

Needless to say, the matrix of what's already announced,

what might be announced and what retaliatory measures are in

place or expected gets pretty complicated.

Numerous "ifs" and "buts" apply. Just one of many unknown

wrinkles for the Canadian dollar and Mexican peso, for example,

is the extent to which some imports will be exempt due to the

USMCA agreements struck during Trump's first term.

Barclays' conclusion is that of the four major currencies

under the gun, the Canadian dollar is reflecting the most

risk, with a 6% tariff premium already priced in. However, the

strategists argue this is still less than half of the move that

would be expected given the tariffs already in place, and even

less based on those that might yet come.

The euro's tariff-related loss since the election of some 4%

is almost half of what might be expected given potential

tariffs, insulating it to some degree.

And if you take all of the worst-case scenarios, Barclays

thinks the peso could be at risk for further depreciation

of 38%, with a risk of a 21% decline for China's yuan

from here, 19% for the Canadian dollar and 9% for the euro

.

Deutsche Bank emphasises differences in relative hits to the

U.S. economy and rival markets of similar-sized tariffs,

pointing out that a U.S. tariff on the euro zone would impact a

greater share of the U.S. economy than that of Europe, whereas

the opposite was true with the impact on Mexico.

Complications aside, if you at least accept that currency

markets are far from fully priced for what's coming, then it's

unlikely stock or bond markets are much more prepared.

To be sure, U.S. growth forecasts have been downgraded and

full-year 2025 earnings growth forecasts for S&P 500 firms have

been dragged lower.

Year-end S&P 500 index targets have been cut too -

even though consensus forecasts remain 15% above current levels.

But if currency markets are any guide, the full blast of

what's to come has yet to be absorbed.

While it's still possible the Trump trade threats are mostly

bluster - that's a nervy stance to cling on to as next Tuesday's

"Liberation Day" approaches.

Chart of the day

Government budget day in Britain is rarely good news for the UK

government bond market, and finance minister Rachel Reeves is

under pressure again to slash government spending as economic

growth forecasts get cut again and defense requirements rise.

A Reuters poll of primary dealers projected 'gilt' issuance

of around 304 billion pounds in the next financial year - the

second-largest remit on record. Worryingly this month, 10-year

gilt yields have edged up relative to the U.S. and

European equivalents. But the market received some relief on

Wednesday from an unexpected drop in UK inflation in February.

Today's events to watch

* U.S. February durable goods orders

* St. Louis Federal Reserve President Alberto Musalem and

Minneapolis Fed President Neel Kashkari to speak; European

Central Bank board member Piero Cipollone and Bank of France

Governor Francois Villeroy de Galhau to speak

* UK finance minister Rachel Reeves announces half-yearly

fiscal forecasts and updated budget

* U.S. corporate earnings: Dollar Tree ( DLTR ), Cintas ( CTAS ), Paychex ( PAYX )

* U.S. Treasury sells $70 billion of 5-year notes, $28

billion of two-year floating rate notes

Opinions expressed are those of the author. They do not reflect

the views of Reuters News, which, under the Trust Principles, is

committed to integrity, independence, and freedom from bias.

(By Mike Dolan; Editing by Anna Szymanski and Ros Russell)