The dollar is soft as the trade deal euphoria wears off. DXY is trading lower near 100.435 after two straight up days. Markets are realizing that the US-UK trade deal is really a series of carve-outs from reciprocal tariffs rather than a comprehensive trade deal (see below). Up next are US-China talks this weekend that should underscore how difficult a deal there will be (see below). The yen is outperforming despite soft wage data (see below), with USD/JPY trading lower near 145.35. Elsewhere, the euro is trading higher near $1.1245 and sterling is trading higher near $1.3270 in the wake of the BOE decision (see below). We continue to view any dollar relief rallies with skepticism, with recent gains unlikely to be sustained no matter how the U.S. data come in. Indeed, recent firm data have pushed out Fed easing expectations and yet the dollar has yet to gain significant traction.
AMERICAS
Fed officials are acknowledging stagflation risks. Governor Barr noted that “The size and scope of the recent tariff increases are without modern precedent, we don’t know their final form and it is too soon to know how they will affect the economy.” He stressed that “In my view, higher tariffs could lead to disruption to global supply chains and create persistent upward pressure on inflation. I am equally concerned that tariffs will lead to higher unemployment as the economy slows. Thus, the FOMC may be in a difficult position if we were to see both rising inflation and rising unemployment.” We concur.
There are many other Fed speakers today. Williams (twice), Barr, Kugler (twice), Barkin, Goolsbee, Waller, Musalem, Hammack, and Cook all speak. All are expected to mirror Powell’s wait and see stance. Markets have gotten the message, as odds of a June cut have fallen below 20%, rising to around 70% in July and fully priced in for September. With the 90-day pause in reciprocal tariffs set to end in early July, even that month seems too soon for a cut given the ongoing uncertainty regarding the tariff impact. Looking ahead, the swaps market is pricing in somewhat less than 100 bp of total easing over the next 12 month, down from 125 priced in last week.
The Q2 growth outlook is solid. The Atlanta Fed GDPNow model has Q2 growth at 2.3% SAAR now vs. 2.2% previously and is nearly back at the initial estimate of 2.4%. It will be updated next Thursday after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.3% SAAR and will be updated today, while its initial Q3 estimate will come at the end of May. For those keeping score at home, the gold-adjusted Atlanta Fed GDP model’s Q1 estimate of -1.5% SAAR was the closest to the actual initial Q1 reading of -0.3%, and that gold-adjusted model is now the standard one.
Canada highlight will be April jobs data. Consensus sees a 5.0k rise in jobs vs. -32.6k in March, while the unemployment rate is expected to rise a tick to 6.8%. Tariffs and uncertainty about trade policy are disrupting the recovery in the labor market that began in late 2024. The number of job postings on Indeed has decreased since mid-January and the Bank’s business survey indicate firms are scaling back hiring. A soft April jobs report will reinforce the case for additional BOC rate cuts and undermine CAD. Markets are pricing in 50 bp of total easing over the next 12 months that would see the policy rate to bottom near 2.25%. This seems about right. Of note, the BOC’s scenario analysis shows Canada’s real GDP growth either stalling in Q2 or contracting over the remainder of 2025.
EUROPE/MIDDLE EAST/AFRICA
The UK-US trade framework was announced yesterday. Under the agreement, the U.S. will get increased market access and a faster customs process for exports to the U.K., while the U.K. will get limited tariff relief on autos, steel, and aluminum. Most economists and pundits remain unimpressed with the deal, which is rather limited in scope and should be viewed as a series of carve-outs for reciprocal tariffs rather than a comprehensive trade agreement. Indeed, the biggest takeaway for us is that U.S. will keep the baseline tariff of 10% on UK goods. This means that tariffs are not going back to pre-Liberation Day levels for any country regardless of any deals struck.
Bank of England cut rates 25 bp to 4.25%, as expected. The MPC voted 5–2-2 to reduce Bank Rate to 4.25%. Two members preferred to cut 50 bp (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill). The three-way vote split suggests back-to-back rate cuts are unlikely. Indeed, the BOE reiterated its guidance for “a gradual and careful approach” to further rate cuts. Moreover, the BOE made minor tweaks to its economic outlook. The 2025 growth outlook was raised, inflation forecasts were revised lower, and the unemployment rate projections were lifted across the forecast horizon. Bottom line: the BOE remains on a cautious easing path which is GBP supportive, especially on the crosses. Odds of a 25 bp cut in June have fallen to roughly 20% from 55% following yesterday’s decision. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months. Governor Bailey and Chief Economist Pill speak today.
April DMP inflation expectations eased. 1-year expectations fell to 3.1% vs. 3.5% expected and 3.4% in March, which reversed last month’s rise. Elsewhere, 3-year expectations fell three ticks to 2.7%, which also reversed last month’s rise. Both series are still well above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path.
Norway reported April CPI data. Headline came in as expected and slowed a tick to 2.5% y/y, while underlying came in two ticks lower than expected at 3.0% y/y vs. 3.4% in March. Yesterday, the Norges Bank kept the policy rate steady at 4.50% and reiterated that “a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon.” However, the Norges Bank pointed out that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” The March Monetary Policy Report implies 50 bp of easing by year-end to 4.00%, which is roughly in line with swaps market pricing.
ASIA
Japan reported soft March cash earnings data. Nominal cash earnings came in four ticks lower than expected at 2.1% y/y vs. 2.7% in February while real earnings came in five ticks lower than expected at -2.1% y/y vs. -1.5% in February. The less volatile scheduled pay growth for full-time workers came in two ticks lower than expected at 2.0% y/y and was steady from February. These readings do not suggest any need to tighten again anytime soon. The swaps market is pricing in just one 25 bp hike to 0.75% over the next three years.
China reported April trade data. Exports came in at 8.1% y/y vs. 2.0% expected and 12.4% in March, while imports came in at -0.2% y/y vs. -6.0% expected and -4.3% in March. This led to a surplus of $96.18 bln vs. $102.64 bln in March. Of note, exports to the U.S. fell -21.0% y/y while those to the EU rose 8.2% y/y. Recall that the U.S. and China will hold their first high-level trade talks Saturday and Sunday in Geneva. Treasury Secretary Bessent cautioned “My sense is that this will be about de-escalation, not about the big trade deal.” President Trump added the tariffs on China “can’t get any higher - it’s at 145%, so we know it’s coming down.” However, China has said tariffs have to be totally eliminated before it will enter into real negotiations.
China reports April CPI and PPI data Saturday local time. CPI is expected at 0.1% y/y vs. -0.1% in March, while PPI is expected at -2.6% y/y vs. -2.5% in March. With the trade war hurting the mainland economy, deflation risks remain elevated and so we expect more stimulus measures in the coming weeks after this week’s batch.
