The dollar has steadied. DXY is trading higher for the first time since last Tuesday near 98.382 after trading as low as 97.921 yesterday, the lowest since April 2022. Trump’s criticism of Fed policy continues but the bank is clearly on hold for the foreseeable future (see below). The yen is outperforming, with USD/JPY trading briefly below 140. Elsewhere, the euro is trading lower near $1.1490 and sterling is trading lower near $1.3370. 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.
AMERICAS
President Trump continues to criticize Fed Chair Powell. After asserting that there is no inflation, Trump said “But there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW.” Trump is clearly setting Powell up to take the blame when the economy slows. There are too many distortions in the economic data right now to get a true sense of the underlying health of the U.S. economy. Indeed, we agree with Atlanta Fed President Bostic’s view that uncertainty may not clear up until late spring or early summer.
Last week’s speech by Powell made it clear that the Fed remains in wait and see mode. Other Fed officials are similarly cautious. Jefferson, Harker, Kashkari, Barkin, and Kugler all speak today. Trump’s criticism of the Fed is likely to continue as the Fed is unlikely to cut rates until mid-year at the soonest. The market sees less than 15% odds of a May cut, rising to around 75% in June and fully priced in for July. This seems about right but of course, it will all come down to the data.
The U.S. rates market is telling us something. The 10-year yield traded near 4.43% today while the 30-year yield traded near 4.93%. With the short end anchored, we are seeing a continued bear steepening of the UST curve along with dollar weakness. This supports the ongoing theme that confidence in U.S. policymaking is waning, as less Fed independence would likely feed into higher inflation as well as a weaker dollar. This in turn would require higher nominal UST yields in order to attract buyers. It's worth noting that the 5-year 5-year inflation breakeven has started to move higher. At 2.27% currently, it is the highest since mid-February; if loss of confidence in the Fed grows, this would rise even more significantly.
Markets are left wondering if there is still a Trump put. We believe so, but the strike price is as yet unknown. The last time Trump seemed to bend to the markets was on April 9, when the reciprocal tariffs went into effect at midnight and were quickly followed by market mayhem that led Trump to declare a 90-day pause that very afternoon. The DJIA traded as low as 36612 during that episode, while the S&P 500 traded as low 4835 and the NASDAQ traded as low as 14784. Elsewhere, the 10-year UST yield spiked to 4.59% that day while the 30-year year spiked to 5.02%, even as high yield bond spreads widened out to 453 bp.
The IMF publishes its latest World Economic Outlook. The IMF is expected to downgrade its global growth outlook in response to heightened trade policy uncertainty. We suspect the updated forecasts will confirm that age-old maxim that when American sneezes, the world catches a cold. Simply put, a global trade war will claim many victims. While the knee-jerk response is to call for the end of U.S. exceptionalism, we fear that many other economies will also slow significantly. Global PMI readings tomorrow could give as some early signs.
EUROPE/MIDDLE EAST/AFRICA
ECB doves remain vocal. GC member Rehn noted that with regards to U.S. tariffs, “In the short term, the impact on euro-area consumer price growth is to the downside.” He added that “The trade war started by President Trump has created exceptional uncertainty, which reduces euro-area economic growth.” ECB easing expectations have picked up in the wake of last week’s decision to cut rates 25 bp. The market has nearly priced in a 25 bp cut at the next meeting June 5. 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 1.25%. Look for the ECB hawks to push back this week against this dovish market pricing. Lagarde, Guindos, and Knot speak later today.
Bank of England officials are recognizing downside risks from U.S. tariffs. MPC member Greene acknowledged that she has been on the cautious side regarding rate cuts but noted that “I think that the tariffs actually represent more of a disinflationary risk than an inflationary risk, though. And so we’ll have to see how that develops going forward.” BOE easing expectations have picked up in recent days. The market has fully priced in a 25 bp cut at the next meeting May 8. 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%. Chief Economist Pill, Governor Bailey, and MPC member Breeden speak tomorrow.
ASIA
A Ministry of Finance survey shows that Japanese firms are already being impacted by U.S. tariffs. The survey was conducted April 9-15 with 518 companies from the auto, steel, and service sectors. About 10% of respondents said tariffs have negatively impacted their businesses. Auto companies said some orders had already been canceled and one firm said it had cut hours for factory workers. Elsewhere, firms in the tourism sector said they are concerned that a stronger yen will discourage inbound visitors. At 140, the yen is strongest since September 2024. Despite elevated price pressures, the Bank of Japan is seen on hold through 2025. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next three years.
Trade talks between Thailand and the U.S. have been postponed. Reports suggest the delay came after the U.S. asked Thailand to address a set of “issues” related to trade. Talks had been set to begin April 23 and no new dates have been set. Prime Minister Paetongtarn Shinawatra said “We’ll approach the talks with the mindset that we’ll give them something if they’re also willing to give us something.” Reports suggest Thailand has offered to boost imports of U.S. commodities such as corn and natural gas whilst reducing tariffs and non-tariff barriers in order to reduce the planned 36% reciprocal tariff. Bottom line: this underscores just how difficult it will be for most nations to strike a deal within the 90-day window.
