The dollar is coming under pressure again. DXY is trading lower near 99.654 as tariff uncertainty continues (see below). USD/JPY is trading lower near 142.75, while the euro and sterling are trading higher near $1.1365 and $1.3275, respectively. 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. As such, we look for continued dollar weakness and view any dollar recoveries as quite fragile, no matter how the U.S. data come in. That said, March retail sales today will be watched for signs that plunging consumer sentiment is finally filtering into the hard data. Given the ongoing unpredictability of Trump administration policy, we continue to downplay any notions of a Fed response in the near term, which official comments would seem to confirm. Today’s speech by Powell should provide markets with some insight into the Fed’s latest thoughts ahead of the May 6-7 FOMC meeting.
AMERICAS
China finally responded to Trump’s entreaties. Reports suggest the U.S. must first meet a set of conditions before Beijing would be willing to sit down and talk. These include reining in disparaging remarks by cabinet members, presenting a more consistent U.S. position, and a willingness to address China’s concerns about sanctions and Taiwan. China also wants the U.S. to choose a point person to take the lead in any talks. Will the Trump administration meet these conditions? Initially, we suspect not. But as the tariff pain for the U.S. mounts, we believe the U.S. will eventually capitulate.
Reports suggest the U.S. has launched a probe into the imports of critical minerals. Similar to the other probes already launched, this is meant to discover whether tariffs should be levied due to national security. This strikes us as odd, as the U.S. imports most of its critical minerals due to the lack of significant domestic sources. According to Bloomberg, the U.S. relies on imports of at least 15 critical minerals, with 70% of so-called rare earths imports come from China. President Trump recently invoked emergency powers to boost U.S. production of critical minerals but most believe the U.S. simply does not have the capacity to produce enough to be self-reliant. Indeed, China has already limited the exports of rare earths to the U.S. as part of its trade war strategy.
Fed Chair Powell speaks about the economic outlook. In his last speech on April 4, Powell reiterated “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” Powell also acknowledged that the economic effects of tariffs “will include higher inflation and slower growth.” Governor Waller was more explicit this week and set out two scenarios (20% effective tariff and 10% effective tariff) that included estimates of their impact on growth (slower), unemployment (higher), and inflation (also higher). Waller agrees with Powell that the spike in inflation would be transitory but other Fed officials are not so sure. Hammack and Schmid also speak today. The market is pricing in less than 20% odds of a May cut, rising to around 85% in June. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months.
U.S. data highlight will be March retail sales. Consensus sees headline at 1.4% m/m vs. 0.2% in February, driven largely by auto sales that front-ran the 25% auto tariffs announced on March 26. Sales ex-autos are expected at 0.4% m/m vs. 0.3% in February, while the so-called control group used for GDP calculations is expected at 0.6% m/m vs. 1.0% in February. Worsening consumer confidence points to downside risks to this data. March IP (-0.2% m/m expected) and February business inventories (0.2% m/m expected) will also be reported.
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 Friday. This still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.4% SAAR and will be updated today after the data. Q1 has drawn to a close but we won’t get official GDP data until April 30.
February TIC data will also be reported. Given the fears of a buyers strike on U.S. assets, especially bonds, the TIC data have taken on more importance. That said, any net outflows stemming from the botched tariff rollout won’t be picked up until the April TIC data out June 18. We suspect the January outflows were an outlier and so February should see a return to net inflows.
Bank of Canada is expected to keep rates steady at 2.75%. However, the market is split. The swaps market sees around 40% odds of a cut while 14 the 29 analysts polled by Bloomberg see a 25 bp cut. Yesterday’s soft March CPI data confirms our call for a cut today. The labor market has already taken a hit, as Canada unexpectedly lost almost 33k jobs in March and business hiring intentions are weak. The April Monetary Policy Report will include updated macroeconomic projections and a revised estimate of the neutral rate. The BOC currently estimates a neutral rate range between 2.25-3.25%. Unless the trade dispute is fully resolved, the BOC will likely bring rates below neutral settings. 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%.
Canada’s two federal leaders will debate. The French-language debate will be held tonight at 8 PM ET, followed by the English-language debate tomorrow night at 7 PM ET. The latest CBC News poll tracker shows Prime Minister Carney’s Liberals holding a consistent lead over the Conservatives and should be heavily favored to win a majority government. Election day is on April 28.
EUROPE/MIDDLE EAST/AFRICA
Reports suggest the European Union has made little progress in its trade talks with the U.S. EU trade chief Sefcovic reportedly left talks with Commerce Secretary Lutnick and U.S. Trade Representative Greer with very little to show. As a result, U.S. officials reportedly indicated that the 20% reciprocal tariffs (10% during the 90-day pause) and the 25% tariffs on autos and metals are likely to remain in force. Last week, the EU delayed its retaliatory tariffs for the same 90-day period when the U.S. announced the pause. However, those will likely go into effect as well as other counter-measures that the EU is working on.
U.K. reported softer March CPI data. Headline came in a tick lower than expected at 2.6% y/y vs. 2.8% in February, core fell a tick as expected to 3.4% y/y, and CPIH came in a tick lower than expected at 3.4% y/y vs. 3.7% in February. Headline decelerated for the second straight month to the lowest since December but remains well above the 2% target. Of note, services inflation came in a tick lower than expected at 4.7% y/y vs. 5.0% in February. For reference, the BOE projected headline at 2.7% y/y and services at 4.9% y/y in March. The BOE is widely expected to cut rates 25 bp to 4.25% at its next meeting May 8, and the softer CPI data simply confirm the need to continue cutting. Looking ahead, the swaps market is pricing in nearly 100 bp of total easing over the next 12 months cuts as the ongoing trade war is expected to worsen the UK growth outlook.
ASIA
Bank of Japan Governor Ueda sounded very cautious. He said U.S. tariffs had led to a “bad scenario” that could force the central bank to make a policy response. Ueda reiterated the bank’s intent to hike interest rates if its economic outlook is realized. At the same time, he also indicated that “Although a policy response may be necessary depending on the situation, we will make an appropriate decision depending on the changing situation.” Lastly, Ueda noted that “Sentiment among some firms and households has already been affected. We will conduct our policy appropriately in line with a shift in risk assessment and projections.” The next BOJ meeting ends May 1 with a widely expected hold. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next three years.
China reported firm real sector data. Q1 GDP growth came in two ticks lower than expected at 1.2% q/q vs. 1.6% in Q4, but the y/y rate came in two ticks higher than expected at 5.4% and was steady from Q4. Elsewhere, March retail sales came in at 5.9% y/y vs. 4.3% expected, IP came in at 7.7% y/y vs. 5.9% expected, and fixed asset investment came in at 4.2% YTD vs. 4.1% expected. Over the weekend, March new loan and aggregate financing came in higher than expected. We expect stimulus measures to pick up as policymakers act to help offset the headwinds from the trade war. However, we continue to expect authorities to continue leaning against excessive yuan weakness.
