Dollar Recovery Continues

May 01, 2025

Win Thin

Reports suggest the Trump administration is preparing a bailout package for farmers; April ISM manufacturing PMI and Challenger layoffs will be the highlights; April ADP came in soft; we got our first look at Q1 GDP data; the path to a U.S.-Canada trade deal may be emerging; BOC released its Summary of Deliberations; Colombia delivered a dovish surprise
BOE easing expectations have picked up
The two-day BOJ meeting ended with a dovish hold;
reports suggest the U.S. has reached out to China to initiate trade talks

The dollar recovery continues. DXY is trading higher for the third straight day near 99.778 despite weak U.S. data and intensifying Fed easing expectations (see below). USD/JPY is trading higher near 144.30 after the dovish hold from the BOJ (see below). Elsewhere, the euro is trading flat near $1.1330 while most of Europe is on holiday, while sterling is trading flat near $1.3335. We continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of tariff uncertainty on the U.S. economy. We view any relief rallies with skepticism, with this week’s gains unlikely to be sustained. Until we get total clarity on the impact of U.S. tariff policy, we look for continued dollar weakness and view any dollar recoveries as fragile, no matter how the U.S. data come in. In that regard, the data this week have been softer than expected and are showing some of the initial negative tariff impact. This softness is likely to continue with today’s data and, more importantly, tomorrow’s jobs report.

AMERICAS

Reports suggest the Trump administration is preparing a bailout package for farmers. Agriculture Secretary Brooke Rollins confirmed that "We are working on that. We are preparing for it. We don't believe it will be necessary. We are out across the world, right now, opening up new markets." She noted that farmers received around $28 bln in bailouts during Trump's first trade war.

April ISM manufacturing PMI will be the highlight. Headline is expected at 48.0 vs. 49.0 in March. Prices paid is expected at 73.0 vs. 69.4 in March. Of note, the regional Fed manufacturing surveys suggest downside risks. However, S&P Global manufacturing PMI rose to 50.7 vs. 50.2 in March and suggests upside risks. Ahead of ISM, Chicago PMI was reported yesterday at 44.6 vs. 45.9 expected and 47.6 in March.

April Challenger layoffs will also be important. In March, layoffs spiked to 275k and was the highest since May 2020. If we get another high number here, it will help cement expectations for a weak NFP tomorrow. Weekly jobless claims will also be reported.

April ADP came in soft. Its private sector jobs estimate came in at 62k vs. 115k expected and a revised 147k (was 155k) in March. We all know ADP is a poor predictor of NFP. That said, the 62k reading is the lowest since July 2024, when ADP was 42k and NFP was 88k. Bloomberg consensus for April NFP is 135k vs. 228k actual in March, while its whisper number stands at 120k. Unemployment is expected to remain steady at 4.2%, while average hourly earnings are expected to pick up a tick to 3.9% y/y.

We got our first look at Q1 GDP data. The economy contracted -0.3% SAAR vs. -0.2% expected and 2.4% in Q4, with personal consumption slowing sharply to 1.8% SAAR vs. 1.2% expected and 4.0% in Q4. Both headline and core inflation accelerated significantly to 3.7% and 3.5%, respectively. The details are worth highlighting. Personal consumption added 1.2 ppt to headline growth vs. 2.7 in Q4, investment added 1.3 ppt vs. -0.2 in Q4, government consumption subtracted -0.2 ppt vs. 0.5 ppt in Q4, and net exports subtracted a whopping -4.8 ppt vs. 0.3 in Q4. Inventories added 2.2 ppt vs. -0.8 in Q4 but this was likely distorted by tariff-related stockpiling. Lastly, private domestic demand was strong at 3.0% SAAR vs. 2.9% in Q4. Bottom line: while the economy seems to have some underlying strength, there are so many distortions that we won't get a clean read of the economy until late spring or early summer, similar to what Atlanta Fed President Bostic has suggested.

The Q2 outlook is a bit better, at least for now. The Atlanta Fed GDPNow model’s initial Q2 estimate is 2.4% SAAR and will be updated today after the data. Of note, the gold-adjusted model has replaced the standard model starting with the Q2 estimate. The New York Fed model has Q2 growth at 2.7% SAAR and will be updated tomorrow, while its initial forecast for Q3 will come out at the end of May. Both models were way off the mark for Q1.

March PCE inflation cooled. Headline PCE eased to 2.3% y/y vs. 2.2% expected and a revised 2.7% (was 2.5%) in February, while core PCE came in as expected at 2.6% y/y vs. a revised 3.0% (was 2.8%) in February. While the move in headline PCE towards the 2% target is welcome, the pickup in the 3-month annualized rate to 3.5% is concerning, especially with the impact of the tariffs likely to pick up significantly in the coming months. Odds of a May cut remain below 10%, rising to around 70% in June and fully priced in for July. 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. More importantly, the swaps market is pricing in 125 bp of total easing over the next 12 months, with 20% odds of another 25 bp.

The path to a US-Canada trade deal may be emerging. President Trump said that newly elected Canadian Prime Minister Carney called him yesterday and said, “Let’s make a deal.” Carney is expected to visit the White House within the next week or so.

The Bank of Canada released its Summary of Deliberations for the April meeting. The account confirmed that Governing Council members debated the case to maintain the policy interest rate or to reduce it by 25 bp. Ultimately, the board reached a consensus to keep rates steady at 2.75% even as it gains more information on tariffs and their impact. Members also agreed to be less forward looking than usual. Markets see 60% odds of a cut at the next meeting June 4, and are pricing in 50 bp of total easing over the next 12 months. This seems about right. The BOC’s scenario analysis shows Canada’s real GDP either stalling in Q2 or contracting over the remainder of 2025.

Colombia central bank delivered a dovish surprise and cut rates 25 bp to 9.25%. The bank had been expected to keep rates steady in the face of President Petro’s demands for more aggressive easing. The bank noted that the cut “maintains a cautious monetary policy stance, while continuing to support the recovery of economic activity without jeopardizing the convergence of inflation to the target.” April CPI data out next Thursday is expected to show further disinflation, which would support the case for this rate cut. Despite the dovish surprise, the swaps market is still pricing in a terminal rate of 8.0% and is unchanged from the start of this week.

EUROPE/MIDDLE EAST/AFRICA

Bank of England easing expectations have picked up. The market has fully priced in a 25 bp cut to 4.25% at the next meeting May 8. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months, as well as 40% odds of another 25 bp that would see the policy rate bottom near 3.25%.

ASIA

The two-day Bank of Japan meeting ended with a dovish hold. The decision was unanimous and the BOJ reiterated its guidance that it will continue to raise the policy rate if the outlook for economic activity and prices will be realized. However, the bank warned that risks to the economic and inflation outlooks are skewed to the downside. Governor Ueda said that board members had different assumptions on where U.S. tariffs on Japan eventually land, hinting that they broadly expect something between the baseline 10% and the full 24% reciprocal announced in early April.

The BOJ updated its macro forecasts. It slashed its growth forecasts for FY25 and FY26 due to the impact of trade and other policies. The BOJ also trimmed its core inflation forecasts for FY25 and FY26, mainly due to the decline in crude oil prices and weaker expected GDP growth. There was little change in market expectations, as the BOJ is still seen on hold through 2025. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next three years.

Reports suggest the U.S. has reached out to China to initiate trade talks. According to a source affiliated with state-run CCTV, the U.S. recently reached out to China though various channels in an effort to jump start negotiations. That source stressed that “China doesn’t need to talk to the US until it takes meaningful measures,” adding that the U.S. is “clearly the more anxious party at the moment.” Meanwhile, USTR Greer confirmed that the two nations are not holding talks yet.

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