The dollar is broadly weaker after reciprocal tariffs were delayed. DXY is trading lower for the third straight day near 102.060 even as risk off impulses return after yesterday’s bout of euphoria after the tariff delay (see below). U.S. equity futures are down 1-2%, while UST yields are lower. The yen and Swiss franc continue to outperform, with USD/JPY trading lower near 145.65 and EUR/CHF trading lower near 0.93055. Elsewhere, both euro and sterling are trading higher near $1.1080 and $1.2920, respectively. Despite the post-pause bounce in risk sentiment, we expect the growth-sensitive majors and EM FX to remain under pressure as risks to global growth remain high regardless of the tariff pause. We also believe that today’s post-pause 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 and so we 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 rescue and so risk off impulses are likely to continue hitting global markets from time to time.
AMERICAS
The tariff uncertainty continues. President Trump announced a 90-day pause on the reciprocal tariffs, while the 10% baseline tariffs on all countries were kept in place. Importantly, tariffs on China were raised to 125% from the 104% that just went into effect. The abrupt U-turn followed turmoil in financial markets and a sharp bond sell-off. Trump noted that “The bond market is very tricky…I was watching it. But if you look at it now, it’s beautiful - the bond market right now. But I saw last night where people were getting a little queasy.” When asked why he paused the tariffs, Trump said “I thought that people were jumping a little bit out of line. They were getting a little bit yippy, a little bit afraid.” We believe this is the first acknowledgment of the Trump Put during his second term.
In our view, relief rallies in risk assets will be short lived and USD will remain under pressure. The pervasive uncertainty created by continuously changing US tariff threats and escalating the US-China trade war remains a major drag to the global economy. There was some interesting insights from the Kiel Institute for the World Economy. According to their model, US trade policy primarily harms the US economy. The logic is that the US is turning away from free trade. But there are around 200 other countries still trading under the existing rules. Meanwhile, the abrupt about face on trade policy further erodes the already dwindling credibility of US policymaking.
FOMC minutes were released. At that March 18-19 meeting, the Fed kept rates on hold for the second straight time and this decision was unanimous. According to the minutes, almost all Fed officials saw “risks to inflation as tilted to the upside and risks to employment as tilted to the downside.” Furthermore, some officials saw “difficult tradeoffs if inflation proved to be more persistent while the outlook for growth and employment weakened.” Lastly, several officials didn’t see a compelling case for slowing the pace of QT, as “A number of participants commented that the Committee’s existing tools could also be used to help address potential disruptions to the market for reserves.” That said, only Governor Waller dissented to the decision to slow QT.
Fed officials are maintaining the wait and see approach. Kashkari said “The hurdle to change the federal funds rate one way or the other has increased due to tariffs. Given the paramount importance of keeping long-run inflation expectations anchored and the likely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economy and potentially increased unemployment is higher.” Hammack said “There’s been a tremendous amount of volatility and the markets and businesses and households are trying to process all of this incoming information, particularly on trade policy. Markets are, generally speaking, pretty good at working themselves out, and I think that’s what we’ve been seeing.” Logan, Schmid, Goolsbee, and Harker speak today. Bowman’s Senate confirmation hearing will also be today.
March inflation data come into focus. CPI will be reported today. Headline is expected to fall three ticks to 2.5% 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. Looking ahead to April, the 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. PPI will be reported tomorrow.
Richmond Fed President Barkin had some insights on the timing of the tariff impact. He noted that "For the most part, there is enough inventory that we're talking about June prices more than we're talking about April prices,” adding that firms typically have 30-60 days of pre-tariff inventory to work through. Barkin noted that "The unknown here is consumer spending, and consumer spending has been supported significantly over the last few years by low unemployment, by increasing real wages and by increasing wealth. So what you look at now is a fragile stock market. Will that cause people to pull back? Unclear." Stay tuned.
The growth outlook remains unsettled. 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 will be updated tomorrow but still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.4% SAAR and will be updated next Wednesday. Q1 has drawn to a close but we won’t get official GDP data until April 30.
Peru central bank is expected to keep rates steady at 4.75%. At the last meeting March 13, the bank kept rates steady at 4.75% for the second straight meeting. The bank saw inflation accelerating back to 2% after the March low and added that economic activity is near potential. However, it warned of increasing global risks. Bloomberg consensus sees only one more 25 bp cut in 2025.
EUROPE/MIDDLE EAST/AFRICA
BOE MPC member Breeden speaks later today. BOE easing expectations have picked up as officials acknowledge the potential impact of the tariffs. The market has nearly priced in a 25 bp cut to 4.25% at the next meeting May 8, while 75-100 bp of total easing over the next 12 months is priced in.
Norway reported mixed March CPI data. Headline came in three ticks lower than expected at 2.6% y/y vs. 3.6% in February, while underlying CPI remained steady as expected 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 swaps market is pricing in 75 bp of easing over the next 12 months followed by an additional 25 bp over the subsequent 12 months that would see the policy rate bottom near 3.5%. In contrast, the Norges Bank forecasts 50 bp of easing by year-end to 4.0%, followed by a gradual decline to 3.0% by the end of 2028. Overall, lower crude oil prices and the unfavorable global growth outlook do not bode well for NOK.
ASIA
RBA Governor Michele Bullock delivers a keynote speech shortly. 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 125 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 and nearly 40% odds of a 50 bp cut then.
China reported soft March CPI and PPI data. CPI came in a tick lower than expected at -0.1% y/y vs. -0.7% in February, while PPI came in two ticks lower than expected at -2.5% y/y vs. -2.2% in February. Overall, China’s economy is still struggling to escape deflationary risks. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption. China's consumption-to-GDP ratio is very low at round 40%, due to high household savings, low household income levels, and high levels of household debt.
China's top leaders are meeting today to discuss additional economic stimulus in response to increased tariffs. Yesterday, China confirmed it will impose an 84% tariff on all imports from the US starting today, in response to the US’s 104% tariff on Chinese goods. Trump further escalated duties on China to 125% and said “I don’t think we’ll have to do it [raise tariff] more. We calculated it very carefully.”
USD/CNY rallied towards the top end of the daily trading band near 7.3500, the highest since 2007. Recall that onshore USD/CNY is allowed to trade within a +/-2% band around the daily fix. Today, the People’s Bank of China set the USD/CNY fix at 7.2092, slightly above yesterday’s 7.2066 fix. Meanwhile, offshore USD/CNH dropped back towards 7.3520 after hitting an all-time high near 7.4290 on Tuesday. Despite the temptation to weaken the yuan, it appears that the PBOC is trying to reign in yuan depreciation by tweaking the USD/CNY fixing gradually.
Philippine central bank cut rates 25 bp to 5.5%, as expected. Governor Remolona said “Like the rest of the world, we’re looking at slower growth, but unlike the rest of the world, we’re looking at lower inflation. On balance, the more manageable inflation outlook and the risks to growth allow for a shift toward a more accommodative monetary policy stance.” He added that “The BSP will continue to take a measured approach in deciding on further monetary easing.” The swaps market is pricing in 200 bp of total easing over the next 12 months, which seems too optimistic given the global backdrop.
