The dollar is soft as tariff noise continues. DXY is trading lower near 103.175 in the wake of yesterday’s volatile moves across global markets (see below). The yen and Swiss franc continue to outperform, with USD/JPY trading lower near 147 and EUR/CHF trading lower near 0.93512. Elsewhere, both the euro and sterling are trading modestly higher near $1.0935 and $1.2760, respectively. Regardless of where the dollar eventually lands, we expect the growth-sensitive majors and EM FX remain under pressure as risks to global growth pile up. We continue to believe that some of the post-tariff dollar weakness was due to a growing loss of confidence in U.S. policymakers and so we view any dollar recoveries as quite fragile, no matter how the U.S. data come in. We continue to downplay any notions of a Fed rescue (see below) and so risk off impulses are likely to continue hitting global markets from time to time.
AMERICAS
Market are relative calm after yesterday’s volatility. Risk on sentiment spiked on reports of a 90-day delay in the tariffs that spread from social media to mainstream media. It wasn’t long before President Trump denied the story, which indeed turned out to be erroneous. In addition, Trump threatened an additional 50% tariff on China if it doesn’t drop its retaliatory tariff of 34% by April 8. China said it would “fight until the end” if the U.S. retaliates further.
More encouragingly, the Trump administration is signaling openness to trade deals. Treasury Secretary Scott Bessent stressed that “for countries that don’t retaliate, we are at a maximum tariff level, and it is my hope that through good negotiations all we will do is see levels come down…But that’s going to depend on the other countries.” Bessent added that Japan is expected to get priority in tariff talks for coming forward very quickly. Regardless, the pervasive uncertainty created by continuously changing US tariff threats and the scope of potential retaliatory measures remain a major blow to the global economy. Bottom line: relief rallies in risk assets will likely be short-lived.
We continue to believe that there will be no Fed put. This is an entirely policy-driven market meltdown and there is no reason for the Fed to bail out the markets. If the Trump administration doesn’t like the market reaction, then it should remove the tariffs. That said, the market sees over 35% odds of a May cut as well as 100-125 bp of total easing over the next 12 months.
Most Fed officials are maintaining a wait and see approach. Kugler said “The takeaway is that I view, right now, inflation as being more pressing as far as the effects of tariffs that we’re already seeing. Maybe this frontloading is going to help, at least in terms of keeping economic activity at the beginning of the year.” She noted that “If we tighten policy, we may weaken the economy. We ease policy, on the other hand, we may drive inflation higher. So we have to be very careful in how we navigate this period.” Elsewhere, Goolsbee said “The anxiety is if these tariffs are as big as what are threatened on the US side, and if there’s massive retaliation, and then if there’s counter retaliation again, it might send us back to the kind of conditions that we saw in ‘21 and ‘22, when inflation’s raging out of control.” Daly speaks today.
March NFIB business optimism fell again. Headline came in at 97.4 vs. 99.0 expected and 100.7 in February. This was the third straight drop to the lowest since October. NFIB Chief Economist Dunkel noted that “The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months. Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them.” Of note, 40% of small business owners reported job openings they could not fill, up 2 percentage points, but the share of those planning to hire over the next three months declined 3 points to 12%, an almost one-year low.
Bank of Canada Q1 business outlook survey points to near-term stagflation risks. The Business Outlook Survey (BOS) indicator reversed its upward trend and fell to -2.1 vs. -1.2 in Q4 and remains below average. The decline reflects lower balances of opinion on employment, investment, and measures of future sales. Meanwhile, one year inflation expectations increased for a second consecutive quarter to 3.61% in March, the highest since October 2023. Still, longer-term inflation expectations remain well anchored around 2% and leaves room for the BOC to ease again next week. March Ivey PMI will be reported today.
EUROPE/MIDDLE EAST/AFRICA
The EU offer for zero tariffs on bilateral trade in industrial goods with the U.S. was rejected. The EU also dropped plans for the 50% retaliatory tariff on American whisky in favor of tariffs on a variety of good that include motorcycles, boats, appliances, tobacco, poultry and other agricultural products. In rejecting the offer, President Trump repeated his claim that the EU “was formed to really do damage to the US on trade, that’s the reason it was formed.” He added “The European Union has been very bad to us.”
We expect the EU to announce a tougher package of tariffs now. The key responses to watch in the trade war are China and the EU. These two account for nearly a third of global GDP; add in the US and the three account for nearly 60%. Tariffs between these three are where the real risks to a global slowdown come from. This is not to downplay the role of Japan, UK, India, and other major economies but it's really these Big Three that need to be monitored.
We suspect the April ECB meeting is not as live as the hawks suggest. GC member Simkus said “I still think that we should cut rates in April, and then, with a lot more information in June - hopefully including more clarity on tariffs and other things - we can think about whether we should wait and see or cut again.” The swaps market is now pricing in 75 bp of total easing over the next 12 months. Near-term, we expect the ECB to deliver a 25 bp cut to 2.25% at the April 17 meeting (about 90% priced in) to preempt the drag to growth from US tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates below the neutral policy settings. ECB staff estimate the neutral rate between 1.75-2.75%. Guindos, Holzmann, and Cipollone also speak today.
ASIA
Japan February current account data will hold some interest. The adjusted surplus came in at JPY2.317 trln vs. JPY2.740 trln expected and a revised JPY1.947 trln (was JPY1.938 trln) in January. However, the investment flows will be of more interest. The February data showed that Japan investors remained net buyers of U.S. bonds (JPY1.467 trln) for the fourth straight month. Japan investors stayed net sellers of both Australian bonds (-JPY92 bln) and Canadian bonds (-JPY165 bln) for the second straight month. Investors stayed net buyers of Italian bonds (JPY426 bln) for the second straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY3.1 trln) for the second straight month. It’s still too early to say that Japan investors have stopped chasing higher yields abroad.
Australia business survey was mixed but consumer confidence plunged. NAB March Business conditions rose 1 point to 4 and remains a little below average, while business confidence fell 1 point to -3. Meanwhile, the Westpac-Melbourne Institute Consumer Sentiment index plunged to a six-month low of 90.1 in April vs. 95.9 in March due to the tariff turmoil.
China appears to be gearing up for greater yuan weakness. Its daily fix was 7.2038 and was above the 7.20 level for the first time since September 2023. This could be meant as a reminder that China has ways of offsetting the tariffs. While a weaker yuan would increase China’s external competitiveness, it would also further curtail the role consumption plays in the economy and worsen domestic imbalances. A currency depreciation is like a tax on consumption that lowers disposable household income and reduces spending. As such, a better way for China to achieve its long-overdue investment-to-consumer pivot is via a gradual revaluation of its currency. This could be the basis for a grand bargain between the US and China. Devaluing USD versus CNY would hit two goals at once: help US President Trump achieve his core goal to revitalize American manufacturing activity and help rebalance China’s economy away from investment towards consumption. Elsewhere, the Shanghai Composite Index recovered slightly today after diving by roughly 9% on Monday. China’s state fund manager, controlled by the Ministry of Finance, confirmed it had taken action to increase its holdings of stock market index funds and promised to buy more.
