The dollar mounted a broad-based recovery last week as risk off impulses dominated. GBP, CHF, and EUR outperformed while the dollar bloc underperformed. The global outlook soured after President Trump confirmed that tariffs would go into effect as planned this week. Furthermore, risk off sentiment was boosted by the contentious Ukraine-U.S. meeting. This week brings key U.S. data that could go a long way toward allaying U.S. recession fears. Either way, the dollar smile is likely to remain in place while risk assets remains vulnerable.
AMERICAS
This will be an important week for the markets. Topline U.S. economic may help markets determine whether recent softness was a quirk or not. Furthermore, tariffs are scheduled to go into effect Tuesday and another delay would shake markets up yet again. Lastly, the Fed could send strong signals this week about its policy stance ahead of the Friday start of the media blackout. All of these events are key and we believe they will largely support the strong dollar narrative.
February jobs report Friday will be the data highlight. Bloomberg consensus for NFP is 160k vs. 143k in January, while its whisper number stands at 135k. Both would be consistent with a healthy labor market. For reference, payroll job gains averaged 237k per month over the past three months, with last month's gains likely held back by the Los Angeles wildfires and the harsh winter weather across much of the nation. Recent government layoffs are a downside risk to the labor market outlook going forward, but it’s worth noting that total federal jobs account for less than 2% of total non-farm employment.
The unemployment rate is expected to remain steady at 4.0%. If so, it would track below the Fed’s 2025 projection of 4.3%. Average hourly earnings are expected to remain steady at 4.1% y/y. Overall, wage growth is running around the sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%. Ahead of that, ADP reports its private sector jobs estimate Wednesday and is expected at 146k vs. 183k in January. February Challenger job cuts and weekly jobless claims will be reported Thursday.
The Fed Beige Book for the March 18-19 FOMC meeting will be published Wednesday. We expect the report to show growing concerns about the impact of planned tariffs as well as possible reports of softness in some regional labor markets due to the federal layoffs, which is likely to be amplified by the impact on contractors that rely on government work. There may also be some reports of softer consumption in some regions. All in all, more regional Fed officials are voicing concerns about the impact of Trump policies and that is likely to be reflected in the tone of this Beige Book. There will also be plenty of Fed speakers this week. Musalem speaks Monday. Williams speaks Tuesday. Harker, Waller, and Bostic speak Thursday. Bowman, Williams, Kugler (twice), and Powell speak Friday. At midnight Friday, the media blackout goes into effect and there are no Fed speakers until Chair Powell’s post-decision press conference March 19.
February ISM PMIs will also be important. Manufacturing will be reported Monday and is expected to fall a tick to 50.8. Prices paid are expected at 56.3 vs. 54.9 in January, while employment is expected at 50.1 vs. 50.3 in January. The regional Fed ISM manufacturing prints suggest the risks are balanced. Of note, S&P Global manufacturing PMI rose 0.4 ticks to 51.6 in February, matching the June 2024 high. Services will be reported Wednesday and is expected to fall a tick to 52.7. The regional Fed ISM services prints point to downside risks. Of note, S&P Global services PMI plunged to 49.7 in February vs. 52.9 in January, the first contraction in the services sector in 25 months.
Tariffs are coming this week. Barring a last-minute delay, tariffs on Chinese imports will double to 20% effective Tuesday. Also, 25% tariffs on Canada and Mexico imports (with a reduced 10% rate for Canadian energy) will come into force that same day. The tariffs on Canada and Mexico were originally expected to be implemented on February 4 but were ultimately delayed 30 days to March 4. For those keeping score at home, steel and Aluminum tariffs are scheduled to go into effect March 12. Reciprocal tariffs are likely to go into effect right after April 2, which marks the end of trade policy reviews. 25% tariffs on autos are also planned for April 2.
January trade data will be reported Thursday. A deficit of -$128.7 bln is expected vs. -$98.4 bln in December. There are upside risks after the advance goods balance blew out to -$153.3 bln in January vs. -$122.0 bln in December, as U.S. importers accelerated purchases ahead of the planned tariffs. Trade imbalances are a key input in the Trump administration’s tariff decisions. Indeed, the Trump administration’s tariff announcements mainly target countries where the U.S. runs large goods trade deficits. The U.S. runs the biggest cumulative goods trade deficits with China and the European Union of -$285 bln and -$226 bln, respectively. The U.S. also runs significant cumulative goods trade deficits with Mexico and Canada of -$174 bln and -$73 bln, respectively.
Canada highlight will also be jobs data Friday. Consensus sees a 17.5k rise in jobs vs. 76.0k in January, while the unemployment rate is expected to rise a tick to 6.7%. Overall, the labor market remains soft and firms’ hiring intentions are muted. Markets are pricing in around 50% odds of a 25 bp cut at the next meeting March 12 as well as a total of 50-75 bp of total easing over the next 12 months. That said, we expect the BOC to pause easing in March in part because core inflation (average of trim and median CPI) is tracking above the BOC’s Q1 projection of 2.5%.
February PMIs will also be important. S&P Global reports its manufacturing PMI Monday. Services and composite PMIs will be reported Wednesday. Ivey PMI will be reported Thursday.
Canada’s Liberal Party will choose its new leader next Sunday. The new leader will effectively become the new Prime Minister as Justin Trudeau resigned. Once parliament reopens on March 24, the new Liberal leader will no doubt face a vote of no confidence that will trigger snap federal elections. However, it’s worth noting that recent polls have shown a resurgence in support for the Liberals as the Conservative Party’s ties to Trump are shaping up to be a potential liability amongst the voters as U.S. tariff threats intensify.
EUROPE/MIDDLE EAST/AFRICA
Eurozone data Highlight will February CPI data Monday. Headline CPI inflation is expected at 2.3% y/y vs. 2.5% in January and core is expected at 2.5% y/y vs. 2.7% in January. The country readings for EU harmonized CPI prints were mixed. Germany was a tick higher than expected at 2.8%y/y vs. 2.8% in December, France was two ticks lower than expected at 0.9% y/y vs. 1.8% in January, while both Spain and Italy came in steady at 2.9% y/y and 1.7% y/y, respectively. Overall, the Eurozone disinflation process remains on track.
European Central Bank meets Thursday and is expected to cut rates 25 bp. The bank is also expected remove reference that monetary policy remains restrictive because the policy rate is getting close to neutral rate territory. ECB staff now estimates the neutral rate between 1.75-2.25%. Scrapping the restrictive reference would signal limited scope to ease policy more than is currently priced in and would offer EUR some support. The swaps market is pricing in 75-100 bp of ECB easing over next 12 months that would see the policy rate bottom between 1.75-2.00%. The ECB will also publish updated macroeconomic projections. After the decision, Lagarde, Nagel, Knot, Panetta, Centeno, and Kazaks all speak Friday.
U.K. highlight will be February DMP inflation expectations Thursday. 1-year expectations are expected to pick up a tick to 3.1%, which would be the highest in nearly a year. In January, 3-year expectations dipped two ticks to 2.7%. Both series remain above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path. Over the next 12 months, the swaps market is pricing in 50 bp of total easing over the next 12 months as well as an additional 25 bp cut over the subsequent 12 months. MPC member Mann speaks Friday.
Switzerland reports February CPI data Wednesday. Headline is expected at 0.2% y/y vs. 0.4% in January while core is expected at 0.7% y/y vs. 0.9% in December. If so, headline would be the lowest since March 2021 and further below the 2% target. At its last meeting in December, the Swiss National Bank cut rates 50 bp to 0.50% but scrapped its previous reference that “further cuts in the SNB policy rate may become necessary in the coming quarters.” The market is pricing in a 25 bp cut at the next meeting March 20 followed by an additional 25 bp cut over the next 12 months that would see the policy rate bottom at 0%. We believe the SNB will likely pause its easing cycle at its upcoming March 20 meeting if headline CPI inflation tracks at or above its Q1 forecast of 0.3% y/y.
Sweden reports February CPI data Thursday. Headline is expected at 1.2% y/y vs. 0.9% in January, while the policy relevant CPIF is expected at 2.7% y/y vs. 2.2% in January while CPIF ex-energy is expected to remain steady at 2.7% y/y. If so, CPIF would be the highest since January 2024 and move further above the 2% target. Inflation is tracking above the Riksbank’s projections made in December and suggests the bar for additional easing is high. Indeed, the Riksbank projects the policy rate to bottom at the current level of 2.25% “but is prepared to act if the outlook for inflation and economic activity changes.” However, markets are pricing in a lower terminal policy rate of 2.00% over the next 12 months.
ASIA
Bank of Japan Deputy Governor Uchida speaks Wednesday. The market now sees the next hike coming in October vs. September at the start of last week as February Tokyo CPI data came in lower than expected Friday. However, the swaps market is still pricing in nearly 50% odds that the policy rate will peak near 1.25%.
Japan highlight will be January labor market data Tuesday. The unemployment rate is expected to remain steady at 2.4% while the job-to-applicant ratio is expected to remain steady at 1.25. Wage data have been mixed lately, with nominal earning rising but real earnings leveling off. The annual spring wage negotiations will be closely watched.
Q4 capital spending will also be reported Tuesday. Consensus sees spending at 5.0% y/y vs. 8.1%, while spending ex-software is expected at 4.7% y/y vs. 9.5% in Q3. Elsewhere, company sales are expected at 3.0% y/y vs. 2.6% in Q3, while company profits are expected at 0.3% y/y vs. -3.3% in Q3.
RBA publishes the minutes to its February meeting Tuesday. At that meeting, the RBA cut rates 25 bp to 4.10% and signaled a cautious easing path ahead. This was the first cut since November 2020 and was virtually fully priced in by markets. The RBA stressed that “in removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made [returning inflation to target] but is cautious about the outlook.” Governor Bullock jawboned expectations for more rate cuts by stressing that “I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the markets are coming.” The RBA will pay particular attention to labor market development to guide future policy decision. Of note, the next cut is not priced in until July.
Australia reports January retail sales Tuesday. Nominal retail sales are forecast at 0.3% m/m vs. -0.1% in December. The “buy major household items” sub-index of the Westpac consumer sentiment remains well below its long-term average and is consistent with subdued retail sales activity.
Australia reports Q4 GDP Wednesday. Real GDP is expected at 0.5% q/q vs. 0.3% in Q3, while the y/y rate is expected at 1.2% vs. 0.8% in Q3. Growth in household consumption expenditure is expected to more than offset the drag from business investment. The Q4 inventories data Monday and net exports data Tuesday will offer a clearer picture of the upcoming GDP figure.
