The dollar was mostly softer last week despite the Friday recovery. CHF, JPY, and EUR outperformed on safe haven flows while AUD, NOK, and NZD underperformed on global growth concerns. The data this week are secondary, with markets instead focusing on the whether the Trump administration softens its tariff plans in the face of market turmoil. For now, they are showing no signs of backing down and so last week’s price action is likely to carry over into this week. For FX, that means JPY and CHF are likely to continue outperforming at the expense of the growth-oriented majors and EM FX.
AMERICAS
We expect the market fallout from the tariffs to continue this week. Miran, Bessent, and Trump have all tried to reassure markets since the meltdown began but to little avail, as they all signaled that there are no policy changes planned in order to address the market selloff. Given this message, equity markets are likely to continue selling off and USTs are likely to continue rallying. It’s hard to get a handle on the dollar, as Thursday weakness was nearly reversed by Friday strength. We continue be believe that a loss of confidence in U.S. policymakers will limit dollar upside but there are hints that the dollar smile remains in play to an extent.
March inflation data come into focus. CPI will be reported Thursday. Headline is expected to fall two ticks to 2.6% y/y while core is expected to fall a tick to 3.0% y/y. The Cleveland Fed’s inflation Nowcast model estimates headline and core at 2.5% and 3.0%, respectively. Watch out for super core CPI (core services less housing), a key measure of underlying inflation. In February, super core CPI eased to 3.8% y/y vs. 4.0% in January, the lowest rate since October 2023. Looking ahead to April, the model estimates headline and core at 2.6% and 3.0%, respectively.
PPI will be reported Friday. Headline PPI is expected at 3.3% y/y vs. 3.2% in February while core PPI is expected at 3.6% y/y vs. 3.4% in February. Watch out for PPI ex-trade, transportation, and warehousing as it feeds into the PCE. In February, this measure fell a tick to a 15-month low at 4.0% y/y.
FOMC minutes will be released Wednesday. At that March 18-19 meeting, the Fed kept rates on hold for the second straight time and this decision was unanimous. Recall that the FOMC statement was tweaked to reflect elevated levels of uncertainty. First, the statement cautioned that “uncertainty around the economic outlook has increased.” Second, the statement scrapped previous reference that “the risks to achieving its employment and inflation goals are roughly in balance.” The updated Dot Plots were unchanged, but the details were skewed in favor of less easing. The updated economic projections painted an unfavorable picture, with growth forecasts cut and inflation forecasts raised. According to Powell “a good part” of the marked-up inflation comes from the effects of tariffs, adding that tariffs “tend to bring growth down and they tend to bring inflation up.” Still, Powell noted that his “base case” is that the inflationary effect from tariffs will be transitory. That will surely be tested.
The Fed also announced it was slowing the unwind in Treasury holdings starting April 1. This was presented as a technical adjustment to ensure reserves remain abundant in the runup to yet another debt ceiling showdown. The Fed will allow up to $5 bln (down from $25 bln) in UST and $35 bln (unchanged) in MBS to roll off its balance sheet each month without reinvestment of principal. Only Governor Waller voted against this action and preferred to continue the previous pace of decline in securities holdings. With reserves actually rising, we agree with Waller and see no need to slow QT now.
Powell presented the latest Fed view last Friday. He spent most of the time talking about inflation risks and the need to remain on hold. However, Powell acknowledged that “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.” 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.
Other Fed officials are also likely to maintain the wait and see approach. Kugler speaks Monday. Daly speaks Tuesday. Barkin speaks Wednesday. Logan, Schmid, Goolsbee, and Harker speak Thursday. Bowman’s Senate confirmation hearing will also be Thursday. Musalem and Williams speak Friday.
University of Michigan reports preliminary April consumer sentiment Friday. Headline is expected at 54.0 vs. 57.0 in March, with current conditions expected to drop to 61.5 and expectations expected to drop to 50.8. Attention will be on inflation expectations as last month’s readings indicated they’re becoming unanchored. 1-year inflation expectations are expected to increase a tick to 5.1%, while 5 to 10 year expectations is expected to increase a tick to 4.2%.
The growth outlook is getting murkier. The New York Fed Nowcast model now estimates Q1 growth at 2.6% SAAR vs. 2.9% the previous week and Q2 growth at 2.4% SAAR vs. 2.6% the previous week. This still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.8% SAAR and will be updated Wednesday. Q1 has drawn to a close but we won’t get official GDP data until April 30.
Bank of Canada Q1 business outlook survey will be reported Monday. Initial results from recent BOC surveys indicated that trade uncertainty was prompting businesses to revise down their sales outlooks, especially in manufacturing and sectors dependent on discretionary consumer spending. Many businesses reported scaling back their investment plans and hiring intentions. Markets are pricing in nearly 60% odds of a follow-up 25 bp BOC policy rate cut at the next meeting April 16 and 75 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
ECB easing expectations have picked up. The swaps market is now pricing in nearly 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 85% 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%. Cipollone speaks Monday. Guindos, Holzmann, and Cipollone speak Tuesday. Knot and Cipollone speak Wednesday. Lagarde speaks Friday.
U.K. data dump comes Friday. February GDP, IP, services, and construction will all be reported. Real GDP is expected at 0.1% m/m vs. -0.1% in January. Risks are skewed to the upside because of the solid increase in February retail sales volumes. Regardless, the Bank of England projects real GDP growth of just 0.1% q/q in Q1, leaving room for the bank to resume easing next month.
Indeed, BOE easing expectations have picked up. The market has nearly priced in a 25 bp cut to 4.25% at the next meeting May 8, while 100 bp of total easing over the next 12 months is priced in. There will be plenty of Bank of England speakers this week. Lombardelli speaks Tuesday. Breeden speaks Thursday. Greene speaks Saturday.
Norway reports March CPI data Thursday. Headline is expected at 3.0% y/y vs. 3.6% in February while underlying CPI is expected to remain steady at 3.4% y/y. At the last meeting March 26, the Norges Bank kept rates steady at 4.50% and stressed that “a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon.” The first cut is not priced in until Q3. Looking ahead, the swaps market is pricing in 75 bp of easing over the next 12 months, followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom near 3.50%. In contrast, the Norges Bank forecasts 50 bp of easing by year to 4.00%, followed by a gradual decline to 3.00% by the end of 2028.
ASIA
Bank of Japan Governor Ueda speaks Wednesday. Last week, Ueda sounded very cautious regarding tariffs and market turmoil. BOJ tightening expectations have adjusted sharply downward following the U.S. tariff announcement, with only 25-50 bp of total tightening priced in over the next three years vs. 75 bp previously. Furthermore, the next hike has been pushed out into 2026 vs. September at the start of this week. Despite this repricing, the yen continues to gain from save haven flows.
Japan highlight will be February cash earnings data Monday. Nominal earnings are expected to pick up two ticks to 3.0% y/y, while real earnings are expected to pick up half a percentage point to -1.3% y/y vs. -1.8% in January. Scheduled full-time pay is expected to remain steady at 3.0% y/y. The wage growth rate agreed in this year's annual spring labor-management wage negotiations so far has been somewhat higher than that agreed last year. This is an upside risk to underlying inflation.
February current account data Tuesday will also hold some interest. An adjusted surplus of JPY2.723 trln is expected vs. JPY1.938 bln in January. However, the investment flows will be of more interest. The January data showed that Japan investors remained net buyers of U.S. bonds (JPY636 bln) for the third straight month. Japan investors turned net sellers (-JPY30 bln) of Australian bonds as well as Canadian bonds (-JPY139 bln). Investors turned net buyers of Italian bonds (JPY16 bln) after one month of net selling. Overall, Japan investors turned total net buyers of foreign bonds (JPY449 bln) after one month of net selling. It’s still too early to say that Japan investors have stopped chasing higher yields abroad.
RBA Governor Michele Bullock gives a keynote speech Thursday. Markets will look to see if Bullock pivots away from her cautious policy guidance to an outright dovish stance due to the downside risk to Australia’s economy from the U.S. tariffs. Australia is a small open economy meaning it is heavily reliant on international trade. The market has already adjusted to price in 100 bp of total easing over the next 12 months vs. 75 bp before the tariff announcement. Meanwhile, the market has fully priced in a 25 bp cut at the next meeting May 20 as well as nearly 33% odds of a 50 bp cut then.
Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 25 bp to 3.5%. At its last 19 February meeting, the RBNZ delivered a third consecutive 50 bp cut to 3.75% and flagged “scope to lower the OCR further through 2025.” The RBNZ sees the OCR bottoming at 3.00% over the next twelve months vs. 2.75% priced by the swaps market. The downside risk to New Zealand’s small open economy from the U.S. tariffs suggests the RBNZ may have to slash the OCR towards the lower end of its 2-4% neutral range estimate. The RBNZ updated Monetary Policy Statement will be published at the following meeting May 28.
