Trust is a Must

USD is tanking against most major currencies, 10-year Treasury yields are rising again, and US stocks remain under downside pressure. The moves largely reflect dwindling credibility in US policymaking following this week’s abrupt about face on trade policy.

USD is vulnerable to more downside in part because of heightened risk the US economy falls into stagflation. The Atlanta Fed GDPNow model adjusted for imports and exports of gold is tracking Q1 growth of -0.3% SAAR on April 9 with the next update due April 16. Moreover, the pervasive uncertainty created by continuously changing US tariff threats can have a negative demand shock, as US households and firms become more hesitant to spend.

US inflation cooled significantly in March. However, the data does not capture looming inflation risks from tariffs. Boston Fed President Susan Collins (FOMC voter) pointed out yesterday that an effective tariff rate somewhat above 10% would raise the core PCE price level by a cumulative 0.7 to 1.2 percentage points with most of the effect likely occurring this year. This would result in core PCE inflation possibly running well above 3% this year. Chicago Fed President Austan Goolsbee (FOMC voter) added “a tariff is like a negative supply shock. That’s a stagflationary shock, which is to say it makes both sides of the Fed’s dual mandate worse at the same time.”

Moreover, survey-based measures of long-term inflation expectations are becoming unanchored. This can complicate the Fed’s job to bring about disinflation without a significant slowing of the economy. In March, the University of Michigan consumer inflation expectations 5-10yrs out surged to 4.1%, the highest since February 1993. The April print is due today (3:00pm London) and is expected to rise to 4.3% which would be the highest since June 1991.

The US March PPI data is also reported today (1:30pm London). Headline PPI is expected at 3.3% y/y vs. 3.2% in February while core PPI is projected 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. Fed speakers today include: Kashkari, Collins, Musalem, and Williams.

Yesterday, the US Congress moved a step closer to advance President Donald Trump’s tax cuts and border priorities. The House adopted the Senate’s amended version of the budget resolution, which allows $5.3 trillion in deficit-financed tax cuts. However, there is still a long way to go in the budget reconciliation process due to the wide gap in spending cuts minimum. The Senate version of the bill calls for a minimum of $4 billion in spending cuts while the House demands $1.5 trillion in cuts. Track the budget progress here.

Overall, it's too soon to tell if the tailwind to US consumer spending from the expected tax cuts will offset the drag from tariff-related uncertainties. However, the projected growing supply of US debt is a recipe for higher Treasury yields if the pattern in foreign demand changes.

UK

GBP is up versus USD but down against EUR. EUR tends to outperform GBP in periods of heightened risk aversion due to the Eurozone’s current account surplus. In Q4, the Eurozone recorded a current account surplus of 2.8%, while the UK had a deficit of -2.7% of GDP.

UK economic activity overshoots expectations in February. Real GDP rose 0.5% m/m (consensus: 0.1%) vs. 0% in January (revised up from -0.1%). All three main sectors grew in February 2025: services output increased by 0.3% and was the largest contributor to the monthly growth in GDP, production output rose by 1.5%, and construction output increased by 0.4%.

Real GDP is tracking above the Bank of England’s (BOE) Q1 projection of 0.1% q/q. But the trade war has worsened the UK growth outlook. The BOE is expected to cut the policy rate 25bps to 4.25% at its next May 8 meeting. Over the next 12 months, the swaps market is pricing in 100bps of cuts and the policy rate to bottom at 3.50%.

UK 10-year gilt yields fell yesterday after the after the BOE rescheduled its planned sale of gilts held in the Asset Purchase Facility (APF) because of “recent market volatility.” The BOE announced it will no longer sell long maturity bonds on April 14, and instead auction short maturity bonds. The BOE intends to reschedule the long maturity auction in Q3.