The dollar has steadied after yesterday’s selloff. DXY is trading higher near 99.524 after strong retail sales data yesterday did nothing to support the dollar (see below). Instead, markets remain focused on the trade war and its likely impact. The yen is underperforming as trade talks with the U.S. began (see below), with USD/JPY trading higher near 142.50. The euro is trading lower near $1.1365 ahead of the ECB decision (see below), while sterling is trading lower in sympathy near $1.3235. 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. Given the ongoing unpredictability of Trump administration policy, we continue to downplay any notions of a Fed response in the near term, which Powell’s comments yesterday would seem to confirm (see below).
AMERICAS
Markets were disappointed that Fed Chair Powell remains focused on the inflation mandate. He noted that “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” Powell said that the Fed will balance its dual mandate, “keeping in mind that, without price stability, we cannot achieve the long periods of strong labor-market conditions that benefit all Americans.” This singular focus on inflation dashed any hopes of a near-term cut to help support the economy. That said, Powell acknowledged the stagflation risks from tariffs, noting that “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
Other Fed officials support the wait and see approach. Hammack said “With both sides of our mandate expected to be under pressure, there is a strong case to hold monetary policy steady in order to balance the risks coming from further elevated inflation and a slowing labor market. When clarity is hard to come by, waiting for additional data will help inform the path ahead.” Barr speaks today. The market is pricing in only 15% odds of a May cut, rising to 75% for June. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months.
March retail sales were firm. Headline came in as expected at 1.4% m/m vs. 0.2% in February, driven largely by auto sales that front-ran the tariffs. However, sales ex-autos came in a tick higher than expected at 0.5% m/m vs. a revised 0.7% (was 0.3%) in February. The so-called control group used for GDP calculations came in two ticks lower than expected at 0.4% m/m vs. a revised 1.3% (was 1.0%) in February. In y/y terms, headline came in at 4.6% vs. 3.5% in February and was the highest since December 2023, ex-autos came in at 3.6% vs. 3.8% in February, and the control group came in at 4.6% vs. 5.1% in February.
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. Q1 has drawn to a close but we won’t get official GDP data until April 30.
February TIC report is worth discussing. Given the fears of a buyers strike on U.S. assets, especially bonds, the TIC data have taken on more importance. Total net TIC flows came in at $284.7 bln vs. a revised -$46.6 bln (was -$48.8 bln) in January, while net long-term TIC flows came in at $112.0 bln vs. a revised -$42.2 bln (was -$45.2 bln) in January. While the return to net inflows in February is certainly welcome, any net outflows stemming from the botched reciprocal tariff rollout won’t be picked up until the April TIC data due out June 18. Meanwhile, foreign demand has been solid at recent UST auctions.
Bank of Canada kept rates steady at 2.75%, as expected. However, it was literally a coin toss in both market pricing and the analyst community. Governor Macklem noted that while a 25 bp cut was discussed, “We decided to hold our policy rate unchanged as we gain more information about both the path forward for US tariffs and their impacts. We still do not know what tariffs will be imposed, whether they’ll be reduced or escalated, or how long all of this will last.” The bank noted that “point forecasts for economic growth and inflation are of little use as a guide to anything.” Instead, the Monetary Policy Report contained two sets of forecasts: one set for a low tariff regime in the U.S. and one set for a high tariff regime. The economic assumptions made for each scenario are too numerous to include here but can be found at the bank’s website here. 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 continue to debate. The English-language debate will be held tonight at 7 PM ET. Last night, the French-language debate was held. The latest CBC News poll tracker show 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
The European Central Bank is expected to cut rates 25 bp to 2.25%. The eurozone disinflationary process remains well on track and the economy faces downside risk from the ongoing trade war. We also expect the ECB to reiterate that “monetary policy is becoming meaningfully less restrictive”. Indeed, the policy rate is moving closer to the lower-end of the ECB staff neutral rate estimate between 1.75-2.75%. Governing Council member Holzmann, a staunch hawk, is expected to dissent or abstain again from voting as he recently noted “I don’t see a reason for a cut.” The swaps market is pricing in 75 bp of total easing over next 12 months. President Lagarde’s press conference will be key for forward guidance. The next set of ECB macroeconomic projections are due in June.
Turkey central bank is expected to keep rates steady at 42.50%. The bank has cut the policy rate by 750 bp since December but may now have to hold rates steady to support the lira amid ongoing domestic political risks as well as rising external risks. The bank has already taken steps to defend the lira. At an interim meeting March 20, the bank tightened monetary conditions without a formal rate hike by raising the lending rate 200 bp to 46%. The bank also sold some of its FX reserves to shore up the lira. Gross FX reserves dropped to $78 bln in the week of April 4 vs. $97 bln the week of March 14, before the domestic political turmoil. The swaps market is pricing in only 50 bp of easing over the next three months but 1075 bp of total easing over the next 12 months, but much will depend on both internal and external developments.
ASIA
Initial trade talks between Japan and the U.S. began. President Trump present at the talks and said there was “big progress.” The talks are meant to reach a deal that would lower the 24% reciprocal tariff that remains on pause. Japan’s lead negotiator Akazawa said “From our side we do want things to progress as fast as possible. But it’s impossible to tell how the negotiations will go.” Of note, the yen was reportedly not a topic at these talks.
Japan reported March trade data. Exports rose 3.9% y/y vs. 4.4% expected and 11.4% in February, while imports rose 2.0% y/y vs. 3.1% expected and -0.7% in February. This result in an adjusted trade balance of -JPY233.6 bln. It should be noted that Japan routinely runs trade deficits but is able to run persistent current account surpluses due to its position as a net international creditor.
BOJ board member Nakagawa was cautious. He said “One of the major uncertainties is tariff policies, which could affect Japan’s economy through various channels. It is necessary to monitor developments with high vigilance.” This echoes recent remarks by Governor Ueda. The market is pricing in no change at the next two-day BOJ meeting that ends May 1. However, the swaps market is pricing in just 25 bp of tightening over the next three years.
Australia reported solid March jobs data. 32.2k jobs were created vs. 40.0k expected and a revised -57.5k (was -52.8k) in February, while the unemployment rate came in a tick lower than expected and remained steady at 4.1%. The breakdown was balanced, with 15.0k full-time jobs created and 17.2k part-time. The RBA signaled it will pay particular attention to labor market developments to guide future policy decision. The market has fully priced in a 25 bp cut at the next meeting May 20, with nearly 20% odds of a larger 50 bp move.
New Zealand Q1 CPI data ran a little hot. Headline came in a tick higher than expected at 0.9% q/q vs. 0.5% in Q4, while the y/y rate came in a tick higher than expected at 2.5% vs. 2.2% in Q4. This was the first acceleration in the y/y rate since Q1 2023 and is the highest since Q2 2024. Tradeable CPI came in as expected at 0.8% q/q vs. 0.3% in Q4, while non-tradeable came in three ticks higher than expected at 1.1% q/q vs. 0.7% in Q4. At its April 9 meeting, the RBNZ cut rates 25 bp to 3.50% and noted it “has scope to lower the OCR further as appropriate.” The RBNZ warned that “the recently announced increases in global trade barriers weaken the outlook for global economic activity. On balance, these developments create downside risks to the outlook for economic activity and inflation in New Zealand.” The market has fully priced in a 25 bp cut at the next meeting May 28. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next six months that would see the policy rate bottom near 2.75%.
Bank of Korea kept rates steady at 2.75%, as expected. There was one dissent in favor of a 25 bp cut to 2.5%. The bank said growth has weakened more than expected due to US trade policy and domestic political uncertainty. It stressed that downside risks have increased significantly since February and so it will continue to maintain a policy bias towards more rate cuts. Governor Rhee said all six members of the board were open to a cut over the next three months, adding that with regards to the next meeting May 29, “Naturally, this will be interpreted as a stronger signal for a cut compared to what was said in the past.” The swaps market is pricing in 50 bp of further easing over the next 12 months that would see the policy rate bottom near 2.25%.
