The dollar continues to firm after the FOMC decision. DXY is trading higher for the second straight day near 100.041 after three straight down days. Markets were caught off guard by Powell’s commitment to steady rates, with Fed easing expectations getting pushed out further (see below). The yen is underperforming after dovish BOJ minutes (see below), with USD/JPY trading as high as 145 before falling back to 144.70 currently. Elsewhere, the euro is trading lower near $1.1295 and sterling is trading flat near $1.3290 ahead of the BOE decision despite reports of a U.S.-U.K. trade deal to be announced (see below). We continue to view any dollar relief rallies with skepticism, with recent gains unlikely to be sustained no matter how the U.S. data come in. Indeed, recent firm data have pushed out Fed easing expectations and yet the dollar has yet to gain significant traction.
AMERICAS
The two-day FOMC meeting ended with the expected hold. The decision was unanimous. The Fed warned that “Uncertainty about the economic outlook has increased further,” adding that “the risks of higher unemployment and higher inflation have risen.” This was a balanced view but the heightened risks to both sides of the mandate really speaks to the difficulty in addressing stagflation. There were no updated macro forecasts or Dot Plots, as the next Summary of Economic Projections are due at the June 17-18 meeting.
Powell was very much in wait and see mode. He stressed again that “We’re in the right place to wait and see how things evolve. We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient.” Most importantly, Powell said “It’s not a situation where we can be preemptive, because we actually don’t know what the right response to the data will be until we see more data.” He noted that the costs of waiting are “fairly low” as so far, the Fed does not see the economic impact in the data yet. Lastly, Powell noted that “despite heightened uncertainty, the economy is still in a solid position. The unemployment rate remains low...Inflation has come down a great deal but has been running somewhat above our 2” longer-run objective.” Odds of a June cut have fallen below 20% while odds of a July cut have fallen to around 75%. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 month, down from 125 bp priced in last week.
Weekly jobless claims will be closely watched. That’s because last week’s initial claims unexpectedly spiked to 241k, the highest since mid-February, and are expected to fall to 230k. Continuing claims also spiked to 1.916 mln last week, the highest since November 2021, and are expected to fall to 1.895 mln. If these spikes are sustained, then it seems that the cracks in the labor market are finally showing up. Stay tuned.
Q1 unit labor costs and nonfarm productivity will be reported. Productivity (GDP/hours worked) is expected at -0.8% SAAR vs. 1.5% in Q4, while ULC is expected at 5.1% SAAR vs. 2.2% in Q4. The more policy-relevant wage data from the employment cost index showed wages and salaries growth eased in Q1 to near a four-year low of 3.5% y/y vs. 3.8% in Q4. The implication is that wage growth is consistent with the Fed’s 2% inflation stability goal, as annual productivity growth is running close to its post-war average of 2.1%. Indeed, Powell pointed out yesterday that “the labor market is not a source of significant inflationary pressures.”
April New York Fed inflation expectations will also be reported. In March, 1-year expectations rose to a 17-month high of 3.58% vs. 3.13% in February, while 3- and 5-year expectations remained anchored near 3%. However, the timelier University of Michigan consumer inflation expectations survey suggests long-term inflation expectations are becoming unanchored. Inflation expectations 5-10 years out surged to 4.4% in April, the highest since June 1991.
The Q2 growth outlook looks solid. The Atlanta Fed GDPNow model has Q2 growth at 2.2% SAAR vs. 1.1% previously and is nearly back at the initial estimate of 2.4%. It will be updated today after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.3% SAAR and will be updated tomorrow, while its initial Q3 estimate will come at the end of May. For those keeping score at home, the gold-adjusted Atlanta Fed GDP model’s Q1 estimate of -1.5% SAAR was the closest to the actual initial Q1 reading of -0.3%, and that gold-adjusted model is now the standard one.
Bank of Canada publishes its annual Financial Stability Report. The 2024 report concluded that Canada’s financial system remained resilient while warning that higher debt serviceability and stretched asset valuations were the two key risks to stability. The updated report will likely be expanded to assess how trade uncertainty is affecting the Canadian financial system.
Peru central bank is expected to keep rates steady at 4.75%. However, the market is split as nearly half the analysts polled by Bloomberg look for a 25 bp cut to 4.5%. At the last meeting April 10, the bank kept rates steady at 4.75% for the third straight meeting. It noted that the economic outlook has deteriorated but added that it expects inflation to accelerate to the 2% target in the coming months.
EUROPE/MIDDLE EAST/AFRICA
Reports suggest a U.S.-U.K. trade deal will be announced. President Trump teased it by saying "This should be a very big and exciting day for the United States of America and the United Kingdom," adding that "The agreement with the United Kingdom is a full and comprehensive one." Trump will reportedly hold a press conference at 10 AM ET. Of note, the U.S. runs a modest trade surplus with the U.K. and so a deal here won’t be as difficult to strike as one with country such as China or the EU, where the U.S. runs significant trade deficits. No wonder market reaction has been muted, with U.K. stock markets modestly higher and sterling flat on the day vs. both USD and EUR.
Bank of England is expected to cut rates 25 bp to 4.25%. An 8-1 vote split is expected, with arch-dove Dhingra likely to support a larger 50 bp cut. The BOE should stick to its guidance of “a gradual and careful approach” to further rate cuts. The quarterly Monetary Policy Report will be released at the same time. Most indicators of UK near-term activity have declined, and services inflation is cooling faster than the BOE’s projection. Markets are pricing in a total 100 bp of easing over the next 12 months that would see the policy rate to bottom near 3.50%. This seems about right.
There is speculation the BOE could prematurely pause its planned sale of gilts held in the Asset Purchase Facility (APF). Last month, the BOE rescheduled the sale of long-dated bonds on April 14 to Q3 in “light of recent market volatility.” We expect the BOE to stick with its quantitative tightening (QT) plan for the rest of the year to September. UK 10-year gilt yields are down near the lower end of its 4.40-4.90% year-to-date range. Also, the BOE tends to share its updated QT plan for the year starting in October at the September meeting, while guidance is usually offered in August.
April DMP inflation expectations will be reported after the decision. 1-year expectations are expected to pick up a tick to 3.5%, the highest since January 2024. In March, 3-year expectations picked up three ticks to 3.0% in February, the highest since November 2023. Both series are moving further above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path.
The Riksbank kept rates steady at 2.25%, as expected. However, it was a dovish hold as the bank warned that more easing may be in the pipeline after signaling in March that it was done easing. Specifically, the Riksbank stressed that “it is somewhat more probable that inflation will be lower than that it will be higher than in the March forecast. This could suggest a slight easing of monetary policy going forward.” The swaps market agrees and is pricing in nearly 50 bp of further easing over the next 12 months. Updated macro forecasts will come at the June meeting.
Norges Bank kept rates steady at 4.5%, as expected. The bank reiterated that “a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon.” However, the bank pointed out that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” The Norges Bank’s Monetary Policy Report from March implies 50 bp of easing by year-end to 4.00%, followed by a gradual decline to 3.0% by the end of 2028. In contrast, the swaps market is pricing less easing, with the policy rate seen bottoming near 3.50% over the next 12 months. The next report will come at the June meeting.
Norway reports April CPI data tomorrow. Headline is expected to slow a tick to 2.5% y/y, while underlying is expected to slow two ticks to 3.2% y/y. Underlying inflation has picked up in recent months and supports the Norges bank decision to delay the start of an easing cycle.
ASIA
Bank of Japan released the minutes to its March meeting. At that meeting, the bank left rates unchanged at 0.50% as was widely expected. The minutes further strengthen the case that there probably won’t be many more rate hikes ahead. One board member warned that the bank needs to be “particularly cautious” when considering tightening if risks rise of a severe impact from U.S. tariffs. One member said it was necessary to carefully examine downside risks from the tariffs, including potential supply chain disruptions. One member felt it was “quite possible” that risks from U.S. tariffs would have a significant negative impact on Japan’s economy. Since then, the BOJ softened its hawkish guidance even more at the May 1 meeting by slashing its growth and inflation projections. The swaps market is pricing in just one 25 bp hike to 0.75% over the next two years.
Bank Negara kept rates steady at 3.0%, as expected. However, it was a dovish hold at the bank cut reserve requirements to 2% vs. 1% previously. This will release around MYR19 bln of liquidity into the system. The bank noted that “the monetary policy stance is consistent with the current assessment of inflation and growth prospects. Recognizing that there are downside risks in the economic environment, the MPC remains vigilant to ongoing developments to inform the assessment on the domestic inflation and growth outlook.” The swaps market is now pricing in 75 bp of easing over the next 12 months vs. 50 bp at the start of this week.
