• The trade wars are back on; Fed Chair Powell’s semi-annual testimony before Congress will be the highlight of the week; New York Fed inflation expectations for January will be reported
  
• The ECB updated its estimate of the neutral rate; U.K. BRC sales for January will be reported late today; Norway January CPI ran a little hot
  
• Japan reported December current account data; China is still struggling to escape a deflationary spiral

The dollar is firm as tariffs come into view. DXY is trading higher for the third straight day near 108.137 on Trump’s weekend promise of 25% tariffs on steel and aluminum (see below). The yen is the worst performing major, with USD/JPY trading higher near 152.15. CAD is also underperforming as Canada is by far the top supplier of steel and aluminum to the US (see below). Sterling is trading lower near $1.2410 and the euro is trading lower near $1.0330. With the truce in the trade war seemingly over, more and more tariff noise is likely in the coming days and weeks. However, we continue to look through that noise and focus on the underlying fundamental backdrop, which remains unchanged. Simply put, the strong U.S. fundamental story of strong growth, elevated inflation, and a more hawkish Fed continues to favor higher U.S. yields and a stronger dollar. Indeed, we believe the ongoing tariff noise is keeping the Fed even more cautious. This week’s CPI, PPI, and retail sales data should all confirm that growth remains strong and inflation remains elevated.

AMERICAS

The trade wars are back on. On Friday, President Trump announced reciprocal tariffs whereby the U.S. would put the exact same tariffs on those countries that have tariffs on U.S. goods. Over the weekend, reports emerged that Trump would announce 25% tariffs on all steel and aluminum imports Monday. Of course, these things can always turn on a dime but these announcements simply confirm our belief that tariffs, while perhaps delayed, are still coming. This will keep the Fed even more cautious, with the first cut now seen in September.

Fed Chair Powell’s semi-annual testimony before Congress will be the highlight of the week. He testifies Tuesday before the Senate Banking Committee and then again Wednesday before the House Financial Services Committee. We expect Powell to take the same cautious tone as he did at the January FOMC meeting. Powell will surely be asked about the impact of tariffs on Fed policy. With more and more tariff details coming to light, we think it will be difficult for Powell to dodge the question.

New York Fed inflation expectations for January will be reported today. Expectations across the spectrum have remained stuck near 3%, reflecting the simple fact that most measures of inflation are closer to 3% than they are to 2%.

Growth remains robust. The Atlanta Fed GDPNow model's estimate for Q1 growth is at 2.9% SAAR and will be updated Friday after the data. The latest Q1 estimate from the NY Fed Nowcast model is at 3.1% SAAR and will also be updated Friday, while its initial forecast for Q2 growth will come in early March.

EUROPE/MIDDLE EAST/AFRICA

The ECB updated its estimate of the neutral rate. The bottom of the neutral rate range is now seen between 1.75-2.25% vs. 1.5% previously, while the upper end is still seen at 3.00%. Regardless, markets continue to price in 75-100 bp of easing over the next 12 months that would see the policy rate bottom between 1.75-2.00%, which would be consistent with the lower end of the new neutral range estimate. Lagarde speaks later today.

U.K. BRC sales for January will be reported late today. Like-for-like sales are expected at 1.0% y/y vs. 3.1% in December. If so, it would nearly reverse last month’s improvement and would bode ill for official retail sales data out February 21. Recent surveys suggest fears of unemployment are holding back consumption.

Norway January CPI ran a little hot. Headline came in a tick higher than expected at 2.3% y/y vs. 2.2% in December, while underlying CPI came in two ticks higher than expected at 2.8% y/y vs. 2.7% in December. We believe Norges Bank remains on track to cut the policy rate in March, but the outlook for more easing beyond that is less certain. At its January meeting, the Norges Bank kept rates steady at 4.50% and reiterated that “the policy rate will most likely be reduced in March.” Markets have fully priced in the start of an easing cycle then as inflation is tracking below the Norges Bank projection. Furthermore, the swaps market still sees the policy rate bottoming near 3.50% over the next two years.

ASIA

Japan reported December current account data. The adjusted surplus came in at JPY2.731 trln vs. JPY2.721 bln is expected vs. JPY3.033 trln in November. However, the investment flows will be of more interest. The December data showed that Japan investors were modest net buyers of U.S. bonds (JPY17 bln) for the second straight month. Japan investors turned net buyers (JPY57 bln) of Australian bonds after three straight month of net selling and also turned net buyers of Canadian bonds (JPY71 bln) three straight months of net selling. Investors turned net sellers of Italian bonds (-JPY533 bln) after one month of net buying. Overall, Japan investors turned total net sellers of foreign bonds (-JPY1.326 trln) after one month of net buying. Even with the return to net selling, it’s still too early to say that Japan investors have stopped chasing higher yields abroad.

China is still struggling to escape a deflationary spiral. Over the weekend, January headline CPI came in a tick higher than expected at 0.5% y/y vs. 0.1% in December and core CPI came in at 0.6% y/y vs. 0.4% in December. However, the pick-up in inflation was due to seasonal factors from the Lunar New Year holiday and should fade in the coming months. Indeed, PPI fell for a second consecutive month by -2.3% y/y and remains a source of downside pressure on CPI inflation.