The dollar is trading firm despite the ongoing tariff uncertainty. DXY is trading higher near 99.542 despite the appeals court ruling that allows the tariffs to be maintained for now (see below). We got a bearish engulfing pattern in DXY yesterday that points to further dollar losses ahead. The yen is outperforming after Tokyo CPI ran hot (see below), with USD/JPY trading lower near 143.90. Elsewhere, the euro is trading lower near $1.1330 after soft eurozone CPI readings (see below) and sterling is trading lower near $1.3475 after dovish BOE comments (see below). We continue to view any dollar relief rallies with skepticism. The fate of the tariffs won’t be known for some time yet, and the Trump administration is seeking out other legal means to enact them (see below). Uncertainty will remain high for an extended period but when all is said and done, US policymaking credibility is taking a big hit and that along with a weaker growth outlook argues for a weaker dollar.
AMERICAS
Trade uncertainty is set to continue. The U.S. Court of Appeals for the Federal Circuit allowed the tariffs to remain in place “until further notice.” In addition, the court laid out a briefing schedule that runs through June 9 to decide on the request for a longer-term stay. Administration officials are already talking about taking the case all the way to the Supreme Court, which would add to the uncertainty. For now, allowing the tariffs to remain in place raises the risks of stagflation, which is both dollar- and equity-negative. Elsewhere, Treasury Secretary Bessent admitted that US-China trade talks have stalled. Specifically, “I would say that they are a bit stalled” but added that he believes more talks will be held with Chinese officials “in the next few weeks.” Why would China engage in serious talks when the tariffs might end?
Administration officials said that they will explore other ways to implement tariffs. Note that the tariffs on autos, steel, and aluminum under Section 232 of the Trade Expansion Act were not impacted by the court ruling. Indeed, the administration had already launched investigations on imports of trucks, copper, lumber, semiconductors, pharmaceuticals, and others earlier this year that would open up the possibility of enacting Section 232 tariffs. However, these investigations can take up to 270 days. National Economic Council Director Hassett said “There are different approaches that would take a couple of months to put these in place and using procedures that have been approved in the past or approved in the last administration, but we’re not planning to pursue those right now.”
A provision in the US House of Representatives’ reconciliation bill is worrisome. Section 899 of the bill aims to impose additional taxes on foreign investors from countries deemed to have “unfair” tax practices (see here for details). If the bill as presently written takes effect, it would deter foreign investment in US assets at a time when the country faces increasing reliance on foreign capital to finance its ballooning budget deficit. Clearly, this is not good for USD.
The Fed reported that Chair Powell met with President Trump yesterday at the White House. This was their first one-on-one meeting in Trump’s second term. This is what Powell said at the last post-decision press conference May 7: “I’ve never asked for a meeting with any president and I never will. There’s never a reason for me to ask for a meeting, it’s always been the other way.” The Fed said “Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.” The Fed added that the two discussed economic developments that included growth, employment and inflation. White House Press Secretary Leavitt later said that President Trump told Chair Powell he is making a mistake in not cutting rates.
Fed officials remain cautious. Goolsbee “If on the back end of this thing, either we don’t put the tariffs in, or they reach some deals that allow us to avoid doing that, we could go back to what we were prior to April 2,” Goolsbee said Thursday, referring to the day President Donald Trump announced widespread tariffs on US trading partners. “If you have stable full employment and inflation going to target, rates can come down to where they would eventually settle.” Daly said “The net net is businesses are still waiting to see, and as they wait to see, we wait to see, because we have policy in a good place for the economy we have.” Logan said “It could take quite some time to know whether the balance of risks is shifting in one direction or another.” Goolsbee speaks today. The odds of a June cut have fallen below 5%, are around 25% in July, and are around 80% in September. Looking ahead, the swaps market is still pricing in around 75 bp of total easing over the next 12 month, down from 125 bp priced in earlier this month.
April PCE readings will be the data highlight. Headline is expected to fall a tick to 2.2% y/y, while core is expected to fall a tick to 2.5% y/y. The 3-month annualized rise in core PCE is concerning. The Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.2% and 2.6%, respectively. The rising ISM prices paid components point to a reacceleration in inflation pressures. Looking ahead, the Nowcast model sees headline and core PCE picking up in May to 2.4% and 2.7%, respectively.
Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.5% in March, while nominal spending is expected at 0.2% m/m vs. 0.7% in March. Real spending is expected flat m/m vs. 0.7% in March. The Atlanta Fed GDPNow model is tracking Q2 GDP growth at 2.2% SAAR in Q2 and personal consumption growth at 3.7% SAAR in Q2.
We got our first revisions to Q1 GDP data. Growth was marked up a tick to -0.2% SAAR vs. expectations it would remain unchanged at -0.3%. Personal consumption was revised down, contributing only 0.8 ppt to growth vs. 1.2 ppt preliminary. Fixed investment was unchanged, contributing 1.3 ppt to growth. Government consumption was marked up a tick and subtracted -0.1 ppt, while net exports were marked down a tick and subtracted -4.9 ppt. The main reason there was little change to the headline was inventories, which added 2.6 ppt to growth vs. 2.2 ppt preliminary. Weaker consumption and bigger inventory build do not bode well for Q3 growth.
For now, the Q2 outlook remains solid. The Atlanta Fed GDPNow model has Q2 growth at 2.2% SAAR while the New York Fed Nowcast model has it at 2.4% SAAR. Both will be updated today. The New York Fed model’s initial Q3 estimate should also come today. Bottom line: the economy remains on solid footing but the impact of the tariffs hasn't fully hit yet.
Canada highlight will be GDP data. Statistics Canada advance information indicates that real GDP increased 0.1% m/m in March after falling -0.2% in February. For Q1, the Bank of Canada estimates real GDP growth of 1.8% SAAR vs. 2.6% in Q4, reflecting a slowdown in consumer spending, residential investment, and business investment. Further out, the BOC’s scenario analysis shows real GDP either stalling in Q2 or contracting over the remainder of 2025. The BOC meets next week and the market is split. 21 of 29 analysts polled by Bloomberg look for a 25 bp cut, while the swaps market only sees around 25% odds of a cut. Looking ahead, the swaps market is pricing in around 50 bp of total easing over the next 12 months. Canada risks entering a period of stagflation which complicates the Bank of Canada’s easing path and is a drag on CAD.
EUROPE/MIDDLE EAST/AFRICA
Eurozone inflation continues to ease at the country level. Spain’s EU Harmonised inflation came in a tick lower than expected at 1.9% y/y vs. 2.2% in April, while Italy’s came in as expected and fell a tick to 1.9% y/y. Spain is one of the only eurozone countries to report core CPI and it came in a tick lower than expected at 2.1% y/y vs. 2.4% in April. Germany reports shortly and is expected to fall two ticks to 2.0% y/y. Earlier this week, France’s EU Harmonised inflation came in three ticks lower than expected at 0.6% y/y vs. 0.9% in April. This was the lowest since December 2020. Eurozone-wide CPI data will be reported Tuesday. Headline is expected to fall two ticks to 2.0% y/y, while core is expected to fall three ticks to 2.7% y/y. The disinflation continues and will allow the ECB to cut rates 25 bp next Thursday.
Bank of England MPC member Taylor argued for more easing. Taylor warned that “I’m seeing more risk piling up on the downside scenario because of global developments” and added that he remained “pretty concerned” about the economic outlook. Taylor’s comments are not surprising as he voted for a 50 bp cut earlier this month. Recall that the MPC voted by a majority of 5-4 to cut rates 25 bp to 4.25% at the May 8 meeting. Two members preferred to cut by 50 bp (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill). In our view, the UK disinflationary process is losing momentum and backs up the case for a more cautious BOE easing path. This is GBP-supportive. The swaps market continues to price in 50 bp of total easing over the next 12 months that would see the policy rate to bottom around 3.75%.
ASIA
May Tokyo CPI data ran a bit hot. Headline remained steady as expected at 3.4% y/y, while core (ex-fresh food) came in a tick higher than expected at 3.6% y/y vs. 3.4% in April and core ex-energy came in a tick higher than expected at 3.3% y/y vs. 3.1% in April. Tokyo core was the highest since January 2023 and moves further above the 2% target. Recall that the Bank of Japan cut its core inflation forecast for FY25 to 2.2% in May vs. 2.4% in January and cut its FY26 forecast to 1.7% in May vs. 2.0% in January. These forecasts seem too low in light of the recent acceleration, but perhaps the expected slowdown in growth will temper inflation in the coming months. The BOJ is still seen on hold through 2025. Looking ahead, the swaps market is still pricing in 25 bp of tightening over the next 12 months.
Japan also reported April labor market data. Unemployment remained steady at 2.5% while the job-to-applicant ratio remained steady at 1.26, both as expected. Despite a relatively tight labor market, wage pressures really haven’t materialized. April cash earnings data will be reported next Thursday. Nominal earnings are expected at 2.6% y/y vs. 2.3% in March, while real earnings are expected at -1.4% y/y vs. -1.8% in March.
Australia reported soft April retail sales data. Headline came in at -0.1% m/m vs. 0.3% expected and actual in March. The drop was driven by declines in clothing, footwear, and personal accessory retailing and department stores. The market is now pricing in 75-100 bp of easing over the next 12 months, up from 75 bp at the start of this week.
China reports official May PMIs Saturday. Manufacturing is expected to rise half a point to 49.5, while non-manufacturing is expected to rise a tick to 50.5. if so, the composite should rise a few ticks from 50.2 in April. Caixin reports its PMIs next week. The impact of the trade war is starting to be felt by China and suggests more stimulus measures are in the pipeline.
