Dollar Firm Ahead of PPI

March 13, 2025

Win Thin

Retaliation is coming; IEA forecasts lower oil demand due to the trade war; risks of a U.S. government shutdown will likely have minimal impact on markets; February CPI report was benign; PPI will be reported today; BOC cut rates 25 bp to 2.75%, as expected; Peru is expected to keep rates steady at 4.75%
ECB wage tracker confirmed that the disinflationary process remains on track; ECB officials are still somewhat split
BOJ Governor Ueda spoke

The dollar remains firm ahead of PPI data. DXY is trading higher for the second straight day near 103.735 after support held near the November 5 low of 103.373 this week. The yen is outperforming, with USD/JPY trading lower near 148.15. The euro is trading lower near $1.0870 after Trump threatened retaliatory measures on the EU (see below), while sterling is trading lower near $1.2955. Recent softness in the U.S. data continues to weigh on the greenback. We are not ready to push the panic button yet but if the data continue to soften, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will come into question. The dollar is finally getting some traction this week due to a combination of risk off impulses and U.S. data that is likely to keep the Fed on hold for now.

AMERICAS

Retaliation is coming. President Trump said “of course I’m going to respond” to the European Union's countermeasures against his new 25% tariffs on steel and aluminum. Last Friday, President Trump also warned that reciprocal tariffs on Canadian lumber and dairy products could come at any time rather than the April 2 data that’s been put forth already. Otherwise, no other tariffs are expected until April 2, when widespread reciprocal tariffs will start to roll out. As we’ve learned, however, that can quickly change.

The International Energy Agency forecasts lower oil demand due to the trade war. It wrote that “The macroeconomic conditions that underpin our oil demand projections deteriorated over the past month as trade tensions escalated between the United States and several other countries,” adding that tariffs have “tilted macro risks to the downside.” At the same time, the IEA increased its forecasts for oil supply after OPEC+ announced that it would go ahead with its scheduled output increase in April. These trends suggest the supply glut will only deepen this year, putting downward pressure on crude oil prices.

Risk of a U.S. government shutdown will likely have a minimal impact on markets. Lawmakers must reach a deal on a stopgap spending bill and pass it before Friday night. Failure to act could lead the U.S. government to temporarily close. In the past, shutdowns lasted only a few days, minimizing the drag on the economy. Moreover, there are ways for the U.S. Treasury to keep paying its bills for several more months before the severe consequences of a debt default becomes an issue. Stay tuned.

February CPI data was benign. Headline CPI came in at 2.8% y/y vs. 3.0% in January while core CPI came in at 3.1% y/y vs. 3.3% in January. Both were a tick lower than expected, while core was the lowest since April 2021. Better yet, super core (core services less housing) fell two ticks to 3.8% y/y and was the lowest since October 2023. However, it’s worth stressing that the February data haven’t fully picked up the impact of the tariffs. Looking ahead, the Cleveland Fed’s Nowcast model forecasts March headline and core at 2.5% y/y and 3.0% y/y, respectively. This may be too optimistic in light of the tariff impact but time will tell.

We know the Fed is on hold until the impact of Trump policies becomes clearer. That is the likely message that the Fed will deliver after next week’s FOMC meeting. However, Fed policymakers are surely happy that the disinflationary trend has resumed. This is very important as it will give the Fed more leeway to cut rates if the economy really does slow significantly in the coming months. Cuts are still priced in for June, September, and December. Next week’s FOMC meeting is likely to produce a widely expected hold, but the Dot Plots and Powell commentary will be key for market expectations.

PPI will be reported today. Headline PPI is expected at 3.3% y/y vs. 3.5% in January while core PPI is expected at 3.5% y/y vs. 3.6% in January. Watch out for PPI ex-trade, transportation, and warehousing as it feeds into the PCE. In January, this measure fell to 4.1% y/y, the lowest since February 2024.

Q4 household net worth will also be reported. In Q3, net worth increased by roughly $4.8 trln, driven by higher equity holding after rising $2.8 trln in Q2. The net worth-to-disposable personal income ratio rose to 778% of GDP from 761% of GDP in Q2, just under its all-time high at 833% of GDP in Q1 2022. Strong household balance sheets are a key factor underpinning solid consumption growth.

Bank of Canada cut rates 25 bp to 2.75%, as expected. The bank warned that the “pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest.” Governor Macklem confirmed there was no consideration for a 50 bp rate cut. Instead, Macklem’s opening statement stressed “Governing Council will proceed carefully with any further changes to our policy rate given the need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.” Bottom line: unless the trade dispute is fully and quickly resolved (unlikely), the BOC will likely bring rates down below neutral, which it estimates is between 2.25-3.25%. The April Monetary Policy Report will include an update to that estimate as well as the macro forecasts. Markets are pricing in an additional 75 bp of easing over the next 12 months and the policy rate to bottom at 2.00%.

Peru central bank is expected to keep rates steady at 4.75%. However, nearly half of the analysts polled by Bloomberg look for a 25 bp cut to 4.5%. At the last meeting February 13, the bank left rates steady after cutting rates 25 bp to 4.75% at the January 9 meeting. It justified a more cautious stance by noting that “Uncertainty remains over the impact of trade policies, as well as risks derived from international conflicts.” Since last fall, the bank has been cutting rates at every other meeting. February headline came in at 1.48% y/y vs. 1.85% in January and was the lowest since September 2018 and near the bottom of the 1-3% target range. As such, we see risk of a 25 bp cut today.

EUROPE/MIDDLE EAST/AFRICA

The ECB’s wage tracker confirmed that the eurozone disinflationary process remains well on track. The headline wage tracker points to negotiated wage pressures easing to 3.3% in 2025 compared with 4.7% in 2024. The previous estimate for 2025 was 3.2%. The wage tracker with unsmoothed one-off payments (like the one used for the ECB’s indicator of negotiated wage growth) points to wage growth easing to 2.8% in 2025 (similar to its previous estimate) from 4.8% in 2024.

ECB officials are still somewhat split. GC member Nagel said “We will achieve price stability this year. We are back to our target at the end of this year - this is good news.” Elsewhere, GC member Kazaks said “Clear forward implicit guidance is impossible because of the very high uncertainty. The key reasons for uncertainty are US policy shifts, the risk of potential tariff wars, and the way the European Union responds.” Markets see less than 50% odds of a 25 bp cut in April to 2.25%. Looking ahead, the swaps market is pricing in only 50 bp of further easing over the next 12 months vs. 75 bp at the start of this week. The prospects for looser fiscal policy in the eurozone may lessen the need for the ECB to cut rates as much as previously expected, which is EUR supportive. Makhlouf, Holzmann, Villeroy, and Nagel speak later today.

ASIA

Bank of Japan Governor Ueda spoke. He warned that “the size of the BOJ's monetary base, balance sheet and current account balance is somewhat too big.” The comments are in line with the BOJ’s plan to shrink its holdings of JGBs in half to JPY3 trln by Q1 2026. Ueda also signaled that the bar is high for the bank to dial up the pace of rate hikes. Ueda reiterated he expects real wages and consumer spending to improve but also cautioned that Japan’s inflationary trend that removes temporary factors is still below 2% target. As such, the BOJ is unlikely to tighten the policy by more than is currently priced, which is a headwind for JPY. The swaps market continues to price in nearly 50 bp of tightening over the next 12 months.

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