The dollar has stabilized as markets remain unsettled in the wake of the tariff announcement. DXY is trading flat near 102.101 after trading as low as 101.267 yesterday, the lowest since early October. Global markets continue to give a thumbs down to the reciprocal tariffs (see below). The yen and Swiss franc continue to outperform, with USD/JPY trading lower near 145.15 and EUR/CHF trading lower near 0.93825. Elsewhere, both the euro and sterling are trading lower near $1.1030 and $1.3010, respectively. As we expected, the growth-sensitive majors and EM FX have come under renewed pressure as risks to global growth pile up (see below). We continue to believe that some of the post-tariff dollar weakness was due to a growing loss of confidence in U.S. policymakers. If so, this current bounce in the greenback is likely to give way to renewed selling as market confidence will be very hard to regain no matter how the U.S. data come in. Today’s highlights will be jobs data and Powell speech (see below).
AMERICAS
The tariff fallout continues. Global stock markets remain under downside pressure and bonds continue to rally. Indeed, the 10-year UST yield is trading at 3.88%, the lowest since early October. The dollar has stabilized but the recovery remains fragile. The trade war is a major blow to the global economy and can further weigh on risk assets in the near-term. IMF Managing Director Georgieva warned that the announced tariff measures “clearly represent a significant risk to the global outlook at a time of sluggish growth.”
Commodity prices are sharply lower as a result. Crude oil prices, already under pressure from global growth concerned, plunged by over 8% after OPEC+ increased supply by three times the planned amount in May. They are down another 5% (and counting) today. The official reason behind the surprise decision is “the continuing healthy market fundamentals and the positive market outlook.” The unofficial reason is that Saudi Arabia wants to drive down crude oil prices to punish members (notably Kazakhstan and Iraq) who have for many months been producing excess oil beyond their quota. Copper and other industrial commodities are also under pressure.
Retaliation is coming. Yesterday, Prime Minister Mark Carney confirmed that Canada will put 25% retaliatory tariffs on US-made vehicles that are not compliant with the United States-Mexico-Canada Agreement (USMCA). China announced 34% tariff on all U.S. imports. It will also Impose export controls on some rare earths. Tit-for-tat tariff retaliation will only worsen the already fragile global growth outlook and will remain a huge drag on risk assets. Yesterday, Treasury Secretary Bessent warned “I wouldn’t try to retaliate…As long as you don’t retaliate, this is the high end of the number.”
U.S. officials seem to welcome a weaker dollar as part of their plan to boost the manufacturing sector. Commerce Secretary Lutnick noted that if the dollar weakens, it becomes easier for the U.S. to export goods. When asked if there were any plans to weaken it, Lutnick said no. This response is a far cry from the days of "a strong dollar is in the best interests of the US." We think Trump officials miss the point that a weak dollar comes at a cost. Foreign investors in U.S. assets don't want to see a weaker dollar and could stay away, thereby driving up borrowing costs for the growing budget deficit. Inflation also tends to go up from a weaker dollar and this is on top of the tariffs.
March jobs report will be the highlight. Bloomberg consensus for NFP at 140k vs. 151k in February while its whisper number stands at 120k. For reference, payroll job gains averaged 168k per month over the past 12 months while the breakeven pace of job gains needed to keep the unemployment rate stable is between 80-100k. The unemployment is seen steady at 4.1%, which would track below the Fed’s 2025 projection of 4.4%, while average hourly earnings are expected to remain steady at 4.0% y/y. Overall, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%.
Challenger layoffs spiked in March. Total announced layoffs came to 275k vs. 172k in February and are the highest since May 2020, the start of the pandemic. This warns of downside risks for NFP today. Government layoffs took the lion’s share at 217k and Andrew Challenger noted that "Job cut announcements were dominated last month by Department of Government Efficiency (DOGE) plans to eliminate positions in the federal government. It would have otherwise been a fairly quiet month for layoffs." Outside of government, layoffs totaled 58k.
Fed Chair Jay Powell gives keynote remarks on the economic outlook. Powell will likely stick to the “no hurry to resume” easing script. We expect Powell to be grilled on the impact of the tariffs on the U.S. outlook, especially on his base case that the inflationary impact will be transitory. A couple of regional Fed Presidents, notably Musalem and Barkin, have warned that the impact of tariff increases on inflation may not be entirely temporary. Barr and Waller also speak today.
Most Fed officials are on hold. Jefferson said there could be “modest softening” in the labor market this year but added that “It’s still the case that there remains a substantial amount of uncertainty around trade and this level of uncertainty, of course, can weigh on households’ and businesses’ investment and spending decisions. So we’re in a situation where it’s going to be important to take our time and think carefully about their impact.” Elsewhere, Cook said “Amid growing uncertainty and risks to both sides of our dual mandate, I believe it will be appropriate to maintain the policy rate at its current level while continuing to vigilantly monitor developments that could change the outlook.” A cut in June is now fully priced in. Looking ahead, the swaps market is pricing in 125-150 bp of total easing over the next 12 months.
ISM services PMI was weak. Headline came in at 50.8 vs. 52.9 expected and 53.5 in February, the lowest since June 2024. This drop was especially surprising after the final March S&P Global services PMI rose a tick from the preliminary to 54.4. Employment fell to 46.2 vs. 53.0 expected and 53.9 in February, the lowest since December 2023. The only bright spot was that activity rose to 55.9 vs. 54.4 in February. Lastly, prices paid fell to 60.9 vs. 63.1 expected and 62.6 in February, but not low enough to put stagflation fears to rest.
The growth outlook is still unclear. The New York Fed Nowcast model estimates Q1 growth at 2.9% SAAR and Q2 growth at 2.6% SAAR and will be updated today. Contrast this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.8% SAAR and will be updated next Wednesday. When adjusted for trade in gold, it improves to -0.8% SAAR. Due to different statistical methodology, the Atlanta Fed model tends to react more to individual data points and is more volatile than the New York Fed model. Q1 has drawn to a close but we won’t get official GDP data until April 30.
Canada highlight will also be jobs data. Consensus sees a 10k rise in jobs vs. 1.1k in February, while the unemployment rate is expected to rise a tick to 6.7%. The labor market outlook is not pretty. Heightened trade uncertainty has led many businesses to scale back their hiring, according to a Bank of Canada survey. Meanwhile, Governor Macklem warned that “depending on the extent and duration of tariffs, the economic impact could be severe. The uncertainty is already causing harm.” Markets are pricing in nearly 50% odds of a follow-up 25 bp cut at the next meeting April 16 and 75 bp of total easing over the next 12 months vs. 50 bp at the start of this week.
Canada also reported weak March PMIs. S&P Global services PMI came in at 41.2 vs. 46.6 in February, while the composite came in at 42.0 vs. 46.8 in February. The composite reading is the lowest since the pandemic. S&P Global and Ivey readings have diverged but we suspect the latter will converge with the former when it’s reported next Tuesday.
EUROPE/MIDDLE EAST/AFRICA
ECB published its account of the March 5-6 policy meeting. The account suggests the decision to cut or pause in April will be live, as it stressed that it was important that the message from the statement “should not be interpreted as sending a signal in either direction for the April meeting, with both a cut and a pause on the table, depending on incoming data.” We expect the ECB to deliver a 25 bp cut to 2.25% at its April 17 meeting (about 85% priced in) to preempt the drag to growth from US tariffs. The swaps market is now pricing in 75 bp of total easing over the next 12 months, with nearly 50% odds of another 25 bp after that. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates below the neutral policy settings. ECB staff estimate the neutral rate between 1.75-2.75%.
Sweden reported soft March CPI data. Headline fell to 0.5% y/y vs. 0.8% expected and 1.3% in February, while the policy relevant CPIF fell to 2.3% y/y vs. 2.6% expected and 2.9% in February. CPIF ex-energy came as expected at 3.0% y/y and was steady from February. Nonetheless, inflation is tracking near the Riksbank’s projections and argues against more policy rate cuts. At its March 20 meeting, the Riksbank kept the policy rate steady at 2.25% and signaled it was done easing. The implication is that US-Sweden 2-year bond yields spreads can further weigh on USD/SEK. However, the swaps market is now pricing in one last 25 bp cut to 2.0% over the next 12 months vs. none at the start of this week.
National Bank of Poland minutes for March will be outdated following this week’s dovish U-turn. At its meeting yesterday, the bank kept rates steady 5.75% but unexpectedly signaled a switch to a dovish stance. Governor Glapinski said lower-than-expected inflation in the first quarter triggered a “radical shift” in policymakers’ outlook, adding that the scale of monetary easing in 2025 may exceed 100 bp if the government prevents energy prices from rising. The swaps market is pricing in 150 bp of total easing over the next 12 months.
ASIA
Bank of Japan Governor Ueda sounded cautious as tightening expectations fall. He said “The introduction of automobile and reciprocal tariffs has increased the uncertainty surrounding domestic and overseas economy and prices. U.S. tariff policies will put downward pressure on the global and Japanese economy through various channels.” BOJ tightening expectations have adjusted sharply downward this week, with only 25 bp of total tightening priced in over the next three years vs. 75 bp at the start of this week. Furthermore, the next hike has been pushed out into 2026 vs. September at the start of this week. Despite this repricing, the yen continues to gain from save haven flows.
Philippines reported soft March CPI data. Headline came in two ticks lower than expected at 1.8% y/y vs. 2.1% in February. This was the lowest since May 2020 and below the 2-4% target range. At the last meeting February 13, the central bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut. Governor Remolona stuck to his previous guidance for a total 50 bp of easing this year and added that a cut is possible at the next meeting in April. The bank meets next Thursday and a 25 bp cut then seems likely. The swaps market is pricing in 125 bp of total easing over the next 12 months.
