The dollar was broadly weaker against the majors last week. CHF, AUD, and NZD outperformed while NOK, GBP, and JPY underperformed. Risk assets rallied after the reciprocal tariffs were paused for 90 days, but we believe the backdrop for U.S. assets remains very negative. While the dollar is likely to remain under pressure this week, we look for EM FX and the growth-sensitive majors to underperform.
AMERICAS
The U.S. added to the tariff uncertainty over the weekend. It was announced that imports of consumer electronics from China were exempted from the 145% tariff rate. Just hours later, Commerce Secretary Lutnick said that these goods would instead by subject to upcoming tariffs on semiconductors “coming in a month or two.” Ongoing policy confusion is likely to feed into what we view as a growing loss of confidence in U.S. policymakers. In turn, this has led to intensifying dollar weakness as well as a steady rise in UST yields at the long end. This has become the overarching theme in global markets and is likely to continue this week.
Fed Chair Powell speaks about the economic outlook Wednesday. In his last speech on April 4, Powell reiterated “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” Powell also acknowledged that the economic effects of tariffs “will include higher inflation and slower growth.” Meanwhile, there continue to be rumblings that Powell will be fired after Supreme Court Chief Justice Roberts reversed a lower court ruling last week and allowed President Trump to fire top officials at two independent agencies. A final order or decision must still be made but if Powell were to be fired, U.S. credibility could be shredded beyond repair. Stay tuned.
Volatility in the UST market last week has led to some concerns about financial stability. Of note, Collins said last Friday that the Fed “would absolutely be prepared” to stabilize markets if conditions became disorderly but added that “Markets are continuing to function well” and “we’re not seeing liquidity concerns overall.” This would clearly have to be some sort of liquidity event on the scale of SVB or perhaps a systemic problem where some markets freeze up. However, this should not be taken to mean the Fed would cut rates. Indeed, in a separate interview, Collins said that “It’s appropriate for us to have a pretty high bar to be pre-emptive.”
There are plenty of Fed speakers besides Powell. Waller, Harker, and Bostic speak Monday. Cook speaks Tuesday. Hammack and Schmid speak Wednesday. Barr speaks Thursday. Daly speaks Friday. All are expected to espouse the wait and see approach that has become Fed consensus. The market is pricing in only 25% odds of a May cut, rising to nearly 90% for June. Looking ahead, the swaps market is pricing in 75-100 bp of total easing over the next 12 months.
March New York Fed inflation expectations will be reported Monday. In February, the survey reinforced the case that progress on inflation is stalling above 2%. Inflation expectations for one, three, and five years ahead are all close to 3%. The timelier University of Michigan consumer inflation expectations survey suggests long-term inflation expectations are becoming unanchored. Inflation expectations 5-10 years out surged to 4.4% in April, the highest since June 1991. This will complicate the Fed’s job to bring about disinflation without a significant slowing of the economy.
U.S. data highlight will be March retail sales Wednesday. Consensus sees headline at 1.4% m/m vs. 0.2% in February, driven largely by auto sales that front-ran the tariffs. President Trump announced a 25% tariff on imported autos and parts on March 26. Sales ex-autos are expected at 0.4% m/m vs. 0.3% in February. The so-called control group used for GDP calculations is expected at 0.6% m/m vs. 1.0% in February. Worsening consumer confidence points to downside risks to this data.
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 Friday. This still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.4% SAAR and will be updated Wednesday. Q1 has drawn to a close but we won’t get official GDP data until April 30.
February TIC data will also be reported Wednesday. Given the fears of a buyers strike on U.S. assets, especially bonds, the TIC data have taken on more importance. That said, any net outflows stemming from the botched tariff rollout won’t be picked up in the TIC data for another couple more months. We suspect the January outflows were an outlier and so February should see a return to net inflows.
Bank of Canada meets Wednesday and is expected to keep rates steady at 2.75%. However, the market is split. The swaps market sees only 30% odds of a cut while only 8 of the 24 analysts polled by Bloomberg see a 25 bp cut. In our view, we look for a cut as the BOC has room to ease policy further 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 April Monetary Policy Report will include updated macroeconomic projections and a revised estimate of the neutral rate. The BOC currently estimates a neutral rate range between 2.25-3.25%. Unless the trade dispute is fully resolved, the BOC will likely bring rates below neutral settings. The swaps markets is pricing in almost 50 bp of total easing over next 12 months that would see the policy rate bottom near 2.25%.
Ahead of the decision, March CPI will be reported Tuesday. 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%.
Canada’s two federal leaders will debate this week. The French-language debate will be held on Wednesday at 8 PM ET, followed by the English-language debate on Thursday at 7 PM ET. The latest CBC News poll tracker shows 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
European Central Bank meets Thursday and 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. Still, looser fiscal policy in Germany and the EU’s military build-up plan suggest there is scope for a modest upward adjustment to ECB rate expectations in favor of EUR. The next set of ECB macroeconomic projections are due in June. Ahead of the decision, the ECB publishes its bank lending survey Tuesday.
April German ZEW investor economic sentiment survey will be reported Tuesday. Expectations index is expected to fall back to 10 after it improved more than expected to a three-year high of 51.6 in March vs. 26.0 in February, which is consistent with a solid recovery in Eurozone economic activity. However, the pervasive uncertainty created by continuously changing US tariff threats and the escalating US-China trade war point to a setback in investor sentiment in April. Of note, current situation index is expected at -86.8 vs. -87.6 in March.
U.K. highlight will be March CPI data Wednesday. Headline is expected to fall a tick to 2.7% y/y, core is expected to fall a tick to 3.4% y/y, and CPIH is expected to fall two ticks to 3.5% y/y. If so, headline would decelerate for the second straight month to the lowest since December but would remain well above the 2% target. Of note, services inflation is expected to fall two ticks to 4.8% y/y. For reference, the BOE projects headline at 2.7% y/y and services at 4.9% y/y in March. The BOE is expected to cut rates 25 bp to 4.25% at its next meeting May 8. Looking ahead, the swaps market is pricing in 75-100 bp of total easing over the next 12 months cuts as the ongoing trade war is expected to worsen the UK growth outlook. Bank of England reports its credit conditions survey Thursday.
Labor market data Tuesday will also be important. The unemployment rate is expected to remain steady at 4.4% for the three month period ending in February. Weekly earning ex-bonus is expected at 6.0% y/y vs. 5.9% in January, while the policy-relevant private earning ex-bonus is expected at 6.0% y/y vs. 6.1% in January. For reference, the Bank of England projects private sector regular pay of 6.2% y/y and an unemployment rate of 4.5% in Q1. Further out, the BOE’s Decision Maker Panel (DMP) survey shows businesses expect year-ahead annual wage growth of 3.9%. Leading indicators 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.
ASIA
Japan highlight will be March national CPI data Friday. Headline is expected to remain steady at 3.7% y/y, core (ex-fresh food) is expected to rise two ticks to 3.2% y/y, and core ex-energy is expected to rise three ticks to 2.9% y/y. If so, core would reverse last month’s drop and would remain well above the 2% target. For reference, the BOJ expects core and core ex-energy to average 2.4% and 2.1% in FY25, respectively. The swaps market is pricing in just 50% odds of a 25 bp hike over the next 12 months. Despite this dovish repricing, JPY should continue to gain from safe haven flows. BOJ board member Nakagawa speaks Thursday.
Reserve Bank of Australia publishes its minutes Tuesday. At that meeting, the bank kept rates steady at 4.10%. The RBA also signaled that it’s in no hurry to resume easing, as Governor Bullock cautioned during the press conference that the Board does not have “100% confidence” that inflation is moving sustainably towards the midpoint of the 2–3% target range. Bullock confirmed that the decision to hold was a consensus one and there was no explicit rate cut discussion. The market has fully priced in a 25 bp cut at the next meeting May 20, along with nearly 40% odds of a larger 50 bp move. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months as the ongoing trade war is projected to worsen Australia’s growth outlook.
Australia data highlight will be March jobs data Thursday. Consensus sees 40k jobs added vs. -52.8k in February, while the unemployment rate is expected to rise a tick to 4.2%. The participation rate is forecast to rise to 66.9% vs. 66.8% in February. The RBA signaled it will pay particular attention to labor market developments to guide future policy decision.
New Zealand highlight will be Q1 CPI data Thursday. Headline is expected at 0.7% q/q vs. 0.5% in Q4, while the y/y rate is expected to pick up a tick to 2.3%. Tradeable CPI is expected at 0.6% q/q vs. 0.3% in Q4, while non-tradeable is expected at 0.8% q/q vs. 0.7% in Q4. Inflation is near the mid-point of the RBNZ’s 1-3% target range, while firms’ inflation expectations and core inflation are consistent with inflation remaining at target over the medium term. 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.” This suggests the RBNZ may have to slash the OCR towards the lower end of its 2-4% neutral range estimate. The swaps market is pricing in 75-100 bp of total easing over the next six months that would see the policy rate bottoming between 2.50-2.75%.
