The dollar is getting some limited traction. DXY is trading higher for the first time since last Monday near 99.725 even as tariff uncertainty continues (see below). USD/JPY is trading lower near 142.85, while the euro is trading lower near $1.1340 and sterling is trading higher near $1.3245. The growth-sensitive majors remain bid as market sentiment improves but we expect weakness to resume as risks to global growth remain high regardless of the tariff pause. 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 official comments would seem to confirm.
AMERICAS
The tariff uncertainty continues. The Commerce Department announced it had begun investigations into the national security implications of “imports of semiconductors and semiconductor manufacturing equipment” as well as of “pharmaceuticals and pharmaceutical ingredients, including finished drug products.” Earlier in the day, President Trump said that he expects to roll out tariffs on pharmaceutical imports in the “not too distant future.” Still, there is no certainty on how things eventually settle. For instance, reports have emerged that Trump is considering some sort of exemptions for the 25% tariff on auto parts due to go into effect May 3. Indeed, Trump said that he was “looking at something to help car companies with it.”
Treasury Secretary Bessent downplayed last week’s bond market chaos. Bessent reiterated his administration’s strong-dollar policy and noted he sees no evidence of sovereign sales of Treasuries. However, the simultaneous sell-off in Treasuries and dollar decline suggests some unwinding in foreign holding of Treasuries. We’ll have to wait for the April US Treasury International Capital (TIC) data out June 18 to gauge the extent of sovereign selling of Treasuries. Until then, ongoing policy confusion is likely to feed into what we view as a growing loss of confidence in U.S. policymakers. This has become the overarching theme in global markets and is likely to continue this week.
Fed officials continue their efforts to quantify the tariff impact. Governor Waller came up with two tariff scenarios: 1) an effective tariff rate of 25%, similar to what is currently in place, and 2) an effective tariff rate of 10% resulting from ongoing negotiations. Under the first scenario, Waller said growth would likely slow “to a crawl,” unemployment would rise significantly, and inflation would also rise significantly and possibly peaking near 5%. However, he called this spike temporary. Waller said "If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the policy rate sooner, and to a greater extent than I had previously thought." He stressed that “With a rapidly slowing economy, even if inflation is running well above 2%, I expect the risk of recession would outweigh the risk of escalating inflation."
We do not think a majority of FOMC policymakers are in Waller’s camp. Indeed, recent comments suggest most are in favor of the wait and see approach that has become Fed consensus. Indeed, Bostic said “The specific place that the economy will land depends critically on the details of where policy lands. Because we don’t know that now, again, that’s another reason why I feel like moving too boldly with our policy in any direction wouldn’t be prudent at the moment.” The market is pricing in around 20% odds of a May cut, rising to around 80% for June. Looking ahead, the swaps market is pricing in nearly 100 bp of total easing over the next 12 months. Cook speaks today.
Treasury Secretary Bessent said he and President Trump are considering who could be the next Fed Chair. Bessent said "We think about it all the time," and added that interviews of potential candidates will likely start in the fall. The term of current Fed Chair Powell ends in May 2026, though his term on the Fed Board does not end until January 31 2028. Stay tuned.
March New York Fed inflation expectations were mixed. 1-year expectations rose to 3.6% vs. 3.1% in February, 3-year expectations were steady at 3.0%, and 5-year expectations fell to 2.9% vs. 3.0% in February. these measures are nowhere near as bad as Michigan (1-year expectations at 6.7% and 5 to 10-year expectations at 4.4%) but are still well above the Fed's 2% target. Market-based break evens are closer to 2% but the Fed should be concerned that these will creep higher and complicate the Fed’s job to bring about disinflation without a significant slowing of the economy. The survey also showed increased pessimism overall. From the New York Fed’s website: Unemployment, job loss, and earnings growth expectations deteriorated. Household income growth expectations declined. Households were also more pessimistic about their year-ahead financial situations and credit access. Stock price expectations declined and reached the lowest level since June 2022.
Canada reports March CPI data. Headline inflation is expected at 2.7% y/y vs. 2.6% in February, while core inflation (average of trim and median CPI) is expected at 3.0% y/y vs. 2.9% in February. The end of the sales taxes break in mid-February is expected to keep upside pressure on prices. Nevertheless, longer-term inflation expectations remain well anchored around 2%. The data come ahead of the Bank of Canada decision tomorrow, when it 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 13 of the 30 analysts polled by Bloomberg see a 25 bp cut. We look for a cut as the trade war risks pushing Canada’s economy into recession. The labor market has already taken a hit, as Canada unexpectedly lost almost 33k jobs in March and business hiring intentions are weak. 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%.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank published its bank lending survey. The latest quarterly survey points to improving financing conditions. Credit standards for loans to firms in April are less tight (a net 3% of banks) than in January (a net 7% of banks). Moreover, expected demand for loans to enterprises in the next three months improved to a net 4% in April vs. -1% in January, while expected demand for housing loans and consumer credit over the next three months continue to increase, albeit at a slower pace. This survey comes ahead of the ECB decision Thursday, when it 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. As such, the swaps market is pricing in 75-100 bp of total easing over next 12 months.
April German ZEW economic sentiment plummeted. Expectations fell to -14 vs. 10 expected and a three-year high of 51.6 in March, while current situation rose to -81.2 vs. -86.9 expected and -87.6 in March. The readings warn of severe downside risk to the eurozone growth outlook, as expectations fell to a 20-month low. ZEW President Wambach noted that “The erratic changes in US trade policy are weighing heavily on expectations in Germany. It’s not only the consequences the announced reciprocal tariffs may have on global trade, but also the dynamics of their changes that have massively increased global uncertainty.” We concur.
U.K. reported labor market data. The unemployment rate remained steady as expected at 4.4% for the three month period ending in February and is tracking below the BOE’s projection of 4.5% for Q1. Weekly earnings ex-bonus came in a tick lower than expected at 5.9% y/y vs. a revised 5.8% (was 5.9%) in January, while the policy-relevant private earnings ex-bonus came in a tick lower than expected at 5.9% y/y vs. a revised 5.9% (was 6.1%) in January. Of note, payrolled employees fell -78k in March vs. -15k expected and a revised -8k (was 21k) in February, and was the largest drop since May 2020. Leading indicators also point to a softer jobs market. In March, the KPMG/REC permanent placement index remained in contraction territory for a 30th month in a row, and its gauge of staff availability rose the most since December 2020. Meanwhile, the BOE’s Decision Maker Panel (DMP) survey shows businesses expect year-ahead annual wage growth of 3.9%. The BOE is widely expected to cut rates 25 bp to 4.25% at the next meeting May 8.
SARB publishes its Monetary Policy Review. The MPR is published twice a year and is aimed at broadening the public’s understanding of the objectives and conduct of monetary policy. The MPR covers domestic and international developments that affect the monetary policy stance. At the last policy meeting March 20, the bank kept rates steady at 7.5%. Governor Kganyago said “The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable. Globally we do not know where policy will end up.” Its model showed the policy rate at 7.25% for end-2025 and 7.21% for end-2026, which is more hawkish than market pricing for a terminal rate near 7.0%.
ASIA
Reserve Bank of Australia minutes suggest the May meeting is live. At that meeting, the bank kept rates steady at 4.10%. However, the minutes show that “Members observed that the May meeting would be an opportune time to revisit the monetary policy setting with the benefit of additional data about inflation, wages, the labor market and trends in economic activity, along with a fresh set of economic forecasts and further information about the likely evolution of global trade policies. Collectively, this information would have a considerable bearing on their decision.” The market has fully priced in a 25 bp cut in May and sees nearly 30% odds of a larger 50 bp move.
China halted the deliveries of any Boeing planes. Policymaker have also instructed its airlines to halt purchases of any aircraft-related equipment and parts. With airlines facing 145% tariffs on these planes, it wouldn’t have made any sense to take any of the deliveries, but policymakers are clearly making a symbolic statement here.
