The dollar is broadly weaker as tariff concerns reemerged. DXY is trading lower near 99.285 after two straight up days. The greenback’s relief rally ran out of steam as China rebuffed U.S. efforts to lower tensions (see below). USD/JPY is trading lower near 142.35 ahead of this afternoon’s meeting of U.S. and Japan finance officials (see below). Elsewhere, the euro is trading higher near $1.1390 and sterling is trading higher near $1.3320. 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 viewed this week’s relief rally with skepticism and today’s price action so far bears this out. 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.
AMERICAS
De-escalation efforts continue. After Trump said he would “be very good to China” regarding tariffs, he later said “It will come down substantially but it won’t be zero.” Reports later emerged that the U.S. was considering a tiered approach to China tariffs, with an overall tariff rate likely to be between 50-65%. The White House stressed that such moves would only be done within the context of trade talks and not unilaterally.
China gave a rather frosty reception. Ministry of Commerce officials said “The US should respond to rational voices in the international community and within its own borders and thoroughly remove all unilateral tariffs imposed on China, if it really wants to solve the problem.” He added that “any reports on development in talks are groundless.”
Tariff concerns dominated the Fed Beige Book report. On Overall Economic Activity: Economic activity was little changed since the previous report, but uncertainty around international trade policy was pervasive across reports. The outlook in several Districts worsened considerably as economic uncertainty, particularly surrounding tariffs, rose. On Labor Markets: Employment was little changed to up slightly in most Districts, with one District reporting a modest increase, four reporting a slight increase, four reporting no change, and three reporting a slight decline. Wages generally grew at a modest pace, as wage growth slowed from the previous report in multiple Districts. On Prices: Most Districts noted that firms expected elevated input cost growth resulting from tariffs. Most businesses expected to pass through additional costs to customers. However, there were reports about margin compression amid increased costs, as demand remained tepid in some sectors, especially for consumer-facing firms. This latest Beige Book was compiled using information gathered on or before April 14.
It's clear the Fed remains in wait and see mode. Hammack said “There’s still a lot of uncertainty around how policies are going to play out and what those impacts are going to be. This is not a good time to be preemptive. This is a good time to sit and wait and watch.” Kashkari speaks today. The market sees less than 10% odds of a May cut, rising to around 60% in June and fully priced in for July. Even July seems too soon given the current tariff uncertainty but really, it will all come down to the data.
S&P Global reported soft preliminary April PMIs. Manufacturing came in at 50.7 vs. 49.0m expected and 50.2 in March, services came in at 51.4 vs. 52.6 expected and 54.4 in March, and the composite came in at 51.2 vs. 52.0 expected and 53.5 in March. This is the lowest composite reading since December 2023. It's only a matter of time before the hard data reflect what the soft data are showing in terms of weakness in the economy.
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 tomorrow. This still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.2% SAAR and will be updated today after the data. The Atlanta Fed announced that it would update its model to adjust for gold imports. It has already been releasing an alternative gold-adjusted estimate (currently at -0.1% SAAR) since March but it will be incorporated into the standard model starting April 30.
Chicago Fed National Activity Index for March will be reported. Headline is expected at 0.12 vs. 0.18 in February. If so, the three-month moving average would fall to 0.07 vs. 0.15 in February. If so, this average would remain 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 will be for the BLS survey week containing the 12th of the month and are expected at 222k vs. 215k previously. Continuing claims are reported with a one-week lag and are expected at 1.869 mln vs. 1.885 mln previously. Bloomberg consensus for April NFP is 123k vs. 228k actual in March, while its whisper number stands at 136k.
Mexico reports mid-April CPI data. Headline is expected at 3.85% y/y vs. 3.93% previously, while core is expected at 3.81% y/y vs. 3.72% previously. If so, headline would move further within the 2-4% target range. At the last meeting March 27, Banco de Mexico cut rates 50 bp to 9.0%, as expected, and indicated that more cuts of “similar magnitude” were possible. Minutes of that meeting showed that “Most members noted that risks associated with trade policy changes in the United States would have both upward and downward repercussions for inflation.” However, one board member noted that “the effects of the uncertainty resulting from said policy so far have already been reflected in an additional weakening of the economy.” Next meeting is May 15 and another 50 bp cut to 8.5% seems likely. Looking ahead, the swaps market is pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.
EUROPE/MIDDLE EAST/AFRICA
ECB doves remain vocal. GC member Rehn said “It’s really important that we maintain full freedom of action, implying that we don’t define certain thresholds because of an assumed neutral rate, and we don’t a priori rule out a certain size of rate cut either. This is a time for agile and active monetary policy.” Elsewhere, Villeroy said “There is currently no inflationary risk in Europe, and we can now almost say ‘mission accomplished’ when it comes to bringing inflation back to our 2% target. It is therefore both fair and appropriate that, compared to the Federal Reserve or the Bank of England, the ECB has started cutting rates earlier, faster, and likely further this year.” The market has nearly priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 1.5%. Nagel, Lane, Simkus, and Rehn speak today.
Germany reported a firm April IFO business climate reading. Headline came in at 86.9 vs. 85.2 expected and 86.7 in March, with current assessment rising to 86.4 and expectations falling to 87.4. IFO President Fuest noted that “Uncertainty among the companies has increased. The German economy is preparing for turbulence.” He added that “The trade war is a huge short-term risk and it’s not entirely clear that these more medium-term fiscal expansion programs can compensate for that. They may come too late.”
The U.K. seems in no rush to secure a trade deal. Chancellor Reeves said “A deal can be done” but added “we’re not going to rush a deal. We want to get the right deal that’s in our national interest. Those talks are ongoing but it’s clear that the U.S. wants a deal.” This follows on the heels of similar push back from Japan. Perhaps U.S. trading partners are following China’s lead and becoming much more willing to call the U.S. bluff. Stay tuned.
Bank of England Governor Bailey sees downside risks. Specifically, he said “We have to take very seriously the risk to growth. I’ve said a number of times, fragmenting the world economy will be bad for growth.” Bailey’s warning came after the U.K. reported soft April PMI readings, with the composite falling to 48.2. BOE easing expectations have picked up. The market has fully priced in a 25 bp cut at the next meeting May 8. Updated macro forecasts will be released then and Bailey’s comments suggest there will be significant downward revisions to the growth outlook. 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 Lombardelli speaks later today.
National Bank of Poland is about to restart its easing cycle. MPC member Wnorowski said he expects a rate cut in May, adding that “The impact of a 25 bp interest rate cut in May will weigh as much as a 50 bp cut, since we have already waited a long time for this cut.” He said preliminary CPI data due April 30 was “key” ahead of May 7 policy meeting. Other MPC members Janczyk and Maslowska have also flagged the likelihood of a cut next month. The swaps market is pricing in 150 bp of total easing over the next 12 months.
ASIA
Japanese and U.S. finance officials meet this afternoon. Trade and FX are expected to be the main topics of discussion. Finance Minister Kato said “Currencies should be determined by the market, and excessive or disorderly moves can have negative impacts on economies and financial stability. This is a basic principle that’s shared among the Group of Seven including the US, and I want to hold talks based on this basic understanding.” The yen has gained over 10% YTD against the dollar and so some of the pressure is off Japan. Treasury Secretary Bessent stressed yesterday “Absolutely no currency targets” and added that “We’d expect the Japanese to honor the G-7 agreement.” Bottom line: we expect nothing significant regarding FX to emerge at today’s meeting.
New Zealand ANZ consumer confidence index rebounded in April. The headline rose to 98.3 vs. 93.2 in March but remains below the long-run average of 113.5. Additionally, the proportion of households thinking it’s a good time to buy major household items, the best retail indicator, rose 5 points to -11 and is the highest since December. Given ongoing weakness in the economy, the RBNZ is expected to cut rates 25 bp to 3.25% at the next meeting May 28. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months.
