The dollar is firm as trade tensions appear to be ebbing. DXY is trading higher near 99.631 and could see its first up week since mid-March. The relief rally is being fueled by positive trade comments from the U.S. as well as reports that China may exempt some U.S. imports from tariffs (see below). USD/JPY is trading higher near 143.30 as yesterday’s meeting of U.S. and Japan finance officials yielded nothing of substance on FX markets (see below). Elsewhere, the euro is trading lower near $1.1355 while sterling is trading higher near $1.3310 after firmer than expected retail sales data (see below). We continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of policy uncertainty on the U.S. economy. We view this week’s relief rally with skepticism (see below). Until we get total clarity on U.S. tariff policy, we look for continued dollar weakness and view any dollar recoveries as quite fragile, no matter how the U.S. data come in. In that regard, some Fed officials appear ready to move on rates sooner rather than later (see below).
AMERICAS
There have been a lot of positive comments about trade deals coming from the U.S. this week. Deals with India, Korea, and Japan are said to be coming sooner rather than later, while talks with China (firmly denied by Beijing) are reportedly ongoing. Studies have shown that the average time it takes to strike a trade deal is around 18 months. As such, we remain very skeptical of this relief rally in the dollar, and view this jawboning as a fairly transparent effort to boost market sentiment. As we all know, talk is cheap and at some point, markets will want to see concrete evidence. Stay tuned.
Some Fed officials appear ready to change policy sooner rather than later. Hammack said “If we have clear and convincing data by June, then I think you’ll see the committee move if we know which way is the right way to move at that point in time.” She added that “To me, this is a good moment for us to take our time and make sure we’re moving in the right direction. You’ve seen that this is not a Fed that’s afraid of moving quickly if we need to move quickly.” Elsewhere, Waller said “It wouldn’t surprise me that you might start seeing more layoffs, a tick up in the unemployment rate going forward if the big tariffs in particular come back on. I would expect more rate cuts, and sooner, once I started seeing some serious deterioration in the labor market.” At midnight tonight, the media blackout goes into effect.
These comments didn’t move the needle much on Fed policy. Odds of a May cut remain below 10%, rising to around 60% in June and fully priced in for July. With the 90-day pause in reciprocal tariffs set to end in early July, even that month seems too soon given the ongoing tariff uncertainty. When all is said and done, however, it will all come down to the data.
The growth outlook is still mixed. The New York Fed Nowcast model estimates Q1 growth at 2.6% SAAR and Q2 growth at 2.6% SAAR and will be updated today. This still greatly contrasts with the Atlanta Fed GDPNow model, which estimates Q1 GDP at -2.5% SAAR and will be updated next Tuesday after the data. The Atlanta Fed just announced that it would update its model to adjust for gold imports. It has already been releasing an alternative gold-adjusted estimate (now at -0.4% SAAR) since March but this will be incorporated into the standard model starting April 30. Lastly, official Q1 GDP data will be reported next Wednesday and Bloomberg consensus is at 0.2% SAAR vs. 2.4% in Q4.
Chicago Fed National Activity Index for March softened. Headline came in at -0.03 vs. 0.12 expected and a revised 0.24 (was 0.18) in February. As a result, the three-month moving average fell to -0.01 vs. a revised 0.12 (was 0.15) in February. This average was the lowest since December but remains well above the -0.7 threshold that typically signals recession. There are still no obvious signs of recession in the hard data yet but with sentiment continuing to plumb new depths, it seems like only a matter of time before the economy slows.
Weekly jobless claims will be of interest. That’s because initial claims were for the BLS survey week containing the 12th of the month, and came in as expected at 222k vs. a revised 216k (was 215k) previously. The 4-week moving average fell to 220k and is the lowest since mid-February. Continuing claims are reported with a one-week lag and came in at 1.841 mln vs. a revised 1.878 mln (was 1.885 mln) and is the lowest since late January. Most indicators suggest the labor market remains in solid shape. Yet Bloomberg consensus for April NFP is 130k vs. 228k actual in March, while its whisper number stands at 132k.
Canada reports February retail sales. Statistics Canada advance estimate indicates headline retail sales decreased -0.4% m/m in February vs. -0.6% in January. Sales ex-autos are expected at -0.2% m/m vs. 0.2% in January. Despite weakness in the economy, the Bank of Canada elected to keep rates steady at 2.75% this month due to ongoing uncertainty regarding the scale and impact of U.S. tariffs. A cut at the June 4 meeting is only about 50% priced in, while the swaps markets is pricing in 50 bp of total easing over next 12 months that would see the policy rate bottom near 2.25%.
Brazil reports mid-April IPCA inflation. Headline is expected at 5.50% y/y vs. 5.26% in mid-March. If so, it would be the highest since February 2023 and would move further above the 1.5-4.5% target range. At the last meeting March 19, The central bank hiked rates 100 bp to 14.25%, as expected, but noted that “In light of the continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle, the Committee anticipates an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected.” The swaps market is pricing in 50 bp of total tightening over the next three months that would see the policy rate peak near 14.75%.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank officials continue to focus on downside risks. GC member Holzmann said “We don’t know where we’ll end up. But I agree with President Christine Lagarde that so far, the net impact from the US tariff announcements seems to be rather deflationary than inflationary.” Chief Economist Lane said a recession was unlikely, adding that “There is a markdown, but it is important to say it is a markdown to a little bit less. It’s still a growing economy.” Of note, Germany just cut its 2025 growth forecast to flat vs. 0.3% previously. ECB easing expectations have picked up. The market has fully priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in nearly 75 bp of total easing over the next 12 months that would see the policy rate bottom near 1.5%.
U.K. reported firm March retail sales. Headline came in at 0.4% m/m vs. -0.4% expected and a revised 0.7% (was 1.0%) in February, while ex-auto fuel came in at 0.5% m/m vs. -0.5% expected and a revised -0.7% (was 1.0%) in February. The y/y rates picked up to 2.6% and 3.3%, respectively. The ONS said that clothing sales were boosted by the sunniest March in England on record and the third-sunniest for the U.K. The rebound is unlikely to be sustained, however, as consumer confidence fell in April due to the tariffs.
Bank of England officials remain cautious. Governor Bailey said that “When I talk to people in the UK economy a lot, they are worried about just the sheer level of uncertainty now in the world economy, the sheer level of uncertainty in policy. And we see it coming through in investment. It’s quite natural for firms to postpone investment decisions. Elsewhere, MPC member Lombardelli said that “we think it’s prudent to assume that this world that we are, that we’ve experienced, is one that we assume we will continue to be in.” In the meantime, easing expectations have picked up. The market has fully priced in a 25 bp cut at the next meeting May 8. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.5%. MPC member Greene speaks later today.
ASIA
Japan Finance Minister Kato spoke about his meeting with Treasury Secretary Bessent. Kato said “There was no talk from the US at all about target levels for exchange rates, or a framework to manage currencies.” He added that both sides agreed that exchange rates “should be determined by the market and that excessive volatility can have a negative impact on economic and financial stability.” Lastly, Kato said he told Bessent that the US tariffs were “highly regrettable.” Elsewhere, there are reports that Japan will decide on a tariff response soon. The possibilities include boosting imports of U.S. corn as well as increased auto investment in the U.S.
April Tokyo CPI data ran hot. Headline came in two ticks higher than expected at 3.5% y/y vs. 2.9% in March, core (ex-fresh food) came in two ticks higher than expected at 3.4% y/y vs. 2.4% in March, and core ex-energy came in three ticks higher than expected at 3.1% y/y vs. 2.2% in March. Tokyo core was the highest since April 2023 and moves further above the 2% target. This bodes ill for the national reading due out May 23.
Data come ahead of the Bank of Japan meeting next week. It is widely expected to keep rates steady at 0.5%. Despite rising price pressures, the Bank of Japan is seen on hold through 2025. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next two years.
China is mulling some tariff exemptions on some U.S. imports. Reports suggest exemptions are being considered for medical equipment, industrial chemicals, and plane leases. While we know the pain of tariffs is real, we are a bit surprised that China is any cracks in its resolute stance so soon. Stay tuned.
Reports suggest the U.S. and Korea could reach some sort of trade deal by next week. After an initial round of talks concluded, Treasury Secretary Bessent said an “agreement of understanding” on trade could be seen as soon as next week. He added that “We had a very successful bilateral meeting. We may be moving faster than I thought, and we will be talking technical terms as early as next week as we reach an agreement on understanding as soon as next week.” As we’ve pointed out before, studies suggest that the average time it takes to reach a trade deal is 18 months. We believe that the Trump administration is trying hard to keep the positive headlines on trade going, but we remain highly skeptical that any agreement of substance can emerge so quickly.
