The dollar is firm ahead of key U.S. data. DXY is trading higher for the second straight day near 99.435 despite weak data and intensifying Fed easing expectations (see below). USD/JPY is trading higher near 143.05 ahead of the BOJ decision tomorrow. Elsewhere, the euro is trading lower near $1.1365 despite stronger than expected Q1 GDP growth (see below), while sterling is trading lower in sympathy near $1.3360. AUD is outperforming modestly after CPI data came in a little hot (see below). 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 due perhaps to some month-end rebalancing. 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 showing some of the initial negative tariff impact. This softness is likely to continue with today’s data and into Friday’s jobs report.
AMERICAS
The trade noise has picked up. Yesterday, Commerce Secretary Lutnick said that one trade deal is pending approval but would not say with which country. Most importantly, Lutnick said that President Trump is not focused on the markets. This will surely be tested in the coming weeks. Elsewhere, President Trump moved to soften the blow of auto tariffs by preventing the compounding of multiple tariffs on vehicles and auto parts and offering tax credits for domestic assembly. China is exempt from this tariff reprieve and Trump still sounds antagonistic towards China. He said “China was making $1 trillion dollars a year. They were ripping us off like nobody has ever ripped us off. Almost every country in the world was ripping us off. They’re not doing that anymore.” When asked about the 145% tariffs on imports from China, Trump said “That’s good. They deserve it.” While trade tensions may have peaked, ongoing uncertainties surrounding U.S. trade policies and the potential negative economic impact of tariffs are likely to keep FX volatility elevated.
Softer US data are having an impact on Fed expectations. Swaps market is now pricing in 125 bp of total easing over the next 12 months, up from 100 bp last week. Odds of a May cut are around 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. When all is said and done, however, it will all come down to the data, and we get quite a bit more this week. Recent U.S. readings have been soft and we expect that softness to continue.
ADP reports its private sector jobs estimate. Headline is expected at 115k vs. 155k in March. This comes ahead of jobs data Friday. Bloomberg consensus for April NFP is 135k vs. 228k actual in March, while its whisper number stands at 126k. 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.
March PCE data will be reported. Headline is expected to fall three ticks to 2.2% y/y, while core is expected to fall two ticks to 2.6% y/y. The Cleveland Fed’s Nowcast model has headline and core at 2.2% and 2.5%, respectively. Looking ahead to April, that model has headline and core at 2.1% and 2.5%, respectively. However, there are clearly upside risks to inflation ahead as the tariffs make their way into the economy.
Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.8% in February, while spending is expected at 0.6% m/m vs. 0.4% in February. Real personal spending is expected at 0.5% m/m vs. 0.1% in February. However, March spending will likely be distorted by consumer purchases that front-ran the tariffs.
We get our first look at Q1 GDP data. Bloomberg consensus sees a contraction of -0.2% SAAR vs. 2.4% in Q4, with personal consumption expected to slow sharply to 1.2% SAAR vs. 4.0% in Q4. The Atlanta Fed GDPNow model's final Q1 estimate is -2.7% SAAR, while the New York Fed Nowcast model’s is at +2.6% SAAR. We can't recall any other time when these forecasts were so far apart. Of note, the Atlanta Fed recently announced that it would update its model to adjust for gold imports. It has already been releasing an alternative gold-adjusted estimate (currently at -1.5% SAAR) since March but this will be incorporated into the standard model starting today with its initial estimate for Q2 GDP. Lastly, the New York Fed Nowcast model has Q2 at 2.7% SAAR and will be updated Friday.
Q1 employment cost index will also be reported. ECI is expected at 0.9% q/q vs. 0.9% in Q4. If so, the y/y rate should fall a couple of ticks from 3.8% in Q4. The ECI is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment. Average hourly earnings and the Atlanta Fed wage growth tracker points to ECI wages & salaries annual growth between 3.8-4.2%. This would be consistent with the Fed’s 2% inflation stability goal as productivity growth is around 2%. April Chicago PMI will also be reported and is expected at 45.9 vs. 47.6 in March.
March JOLTS data show some softening of the labor market. Job openings came in at 7.192 mln vs. 7.500 mln expected and a revised 7.480 mln (was 7.568 mln) in February. This was the lowest since September. Even worse, the openings rate fell two ticks to 4.3%, matching the cycle low from last September. A drop below the 4.5% level typically signals a significant rise in the unemployment rate ahead. The key takeaway is that the U.S. labor market began to weaken even before the uncertainties triggered by the escalation of President Trump’s trade war, marked by the April 2 “Liberation Day.” Weekly jobless claims and April Challenger layoffs will be reported tomorrow and will help round out a more complete picture of the labor market.
Conference Board April consumer confidence plunged. Headline fell to 86.0 vs. 88.0 expected and a revised 93.9 (was 92.9) in March. This was the fifth straight drop to the lowest since January 2021. Present situation fell to 133.5 vs. a revised 134.4 (was 134.5) while expectations plunged to 54.4 vs. a revised 66.9 (was 65.2) in March, the lowest since October 2011. The labor index (jobs plentiful minus jobs hard to get) fell 2.4 points to a seven-month low of 15.1, indicative of weaker labor market conditions. Look for a sharp slowdown in consumption once the tariff front-running ends.
Canada reports February GDP data. Statistics Canada advance estimate indicates that real GDP by industry was flat in February vs. 0.4% in January. Increases in the manufacturing and finance and insurance sectors were offset by decreases in the real estate and rental and leasing sector, the oil and gas extraction subsector, and the retail trade sector. Of note, the y/y rate is expected at 1.7% vs. 2.2% in January.
Colombia central bank is expected to keep rates steady at 9.5%. At the last meeting March 31, the bank kept rates steady at 9.5% for the second straight meeting and noted that “The decision not to change the interest rate maintains a cautious monetary stance pending new information over the coming months to determine the possibility of further interest rate cuts.” However, it was a 4-3 split vote and so the bar for the next cut is quite low. Indeed, the swaps market is pricing in 125 bp of easing over the next 12 months that would see the policy rate bottom near 8.25%.
EUROPE/MIDDLE EAST/AFRICA
Eurozone April CPI data continued rolling out. France’s EU Harmonised inflation came in a tick higher than expected at 0.8% y/y vs. 0.9% in March and Italy came in two ticks lower than expected at 2.1% y/y and was steady from March. Germany reports later and is expected at 2.1% y/y vs. 2.3% in March. Spain reported yesterday and its EU Harmonised inflation came in two ticks higher than expected at 2.2% y/y and was steady from March while core inflation came in a tick higher than expected at 2.4% y/y vs. 2.0% in March. Eurozone CPI data will be reported Friday. Headline inflation is expected at 2.1% y/y vs. 2.2% in March and core inflation is expected at 2.5% vs. 2.4% in March.
The disinflation process continues and should allow the ECB to continue easing. Inflation is close to the ECB’s 2% medium-term target and is tracking the ECB’s projections for headline and core inflation to average 2.3% and 2.2% in 2025, respectively. The market has fully priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in nearly 75 bp of total easing over the next 12 months that would see the policy rate bottom near 1.5%. Villeroy and Makhlouf speak later today.
Eurozone Q1 growth picked up. Eurozone growth came in at 0.4% q/q vs. 0.2% expected and actual in Q4. Looking at the country breakdown, France came in as expected at 0.1% q/q vs. -0.1% in Q4, Italy came in a tick higher than expected at 0.3% q/q vs. a revised 0.2% (was 0.1%) in Q4, and Germany came in as expected at 0.2% q/q vs. -0.2% in Q4. Spain reported yesterday and came in a tick lower than expected at 0.6% q/q vs. a revised 0.7% (was 0.8%) in Q4. While the upside surprise is welcome, headwinds will pick up as the trade war intensifies and global growth slows.
Poland reported soft April CPI data. Headline came in a tick lower than expected at 4.2% y/y vs. 4.9% in March. This was the lowest since July 2024 but remains above the 1.5-3.5% target range. At the last policy meeting April 2, National Bank of Poland kept rates steady at 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. Next meeting is May 7 and the market is now looking for a 50 bp cut to 5.25%. Looking ahead, the swaps market is pricing in 125 bp of total easing over the next 12 months, followed by another 75 bp over the subsequent 12 months that would see the policy rate bottom near 3.75%.
ASIA
The two-day Bank of Japan meeting started today and ends tomorrow with an expected hold. Uncertainty surrounding the future development of trade policies support the case for a continued pause in the tightening cycle. The BOJ is also set to publish its updated Outlook Report. The bank will likely raise its inflation forecasts as both core and core ex-energy are tracking higher than it anticipated back in January. Despite rising price pressures, the Bank of Japan is seen on hold through 2025. Looking ahead, the swaps market is pricing in only 25 bp of tightening over the next 12 months.
Japan reported mixed March real sector data. Retail sales came in at 3.1% y/y vs. 3.5% expected and 1.3% in February, IP came in at -0.3% y/y vs. 0.8% expected and 0.1% in February, and housing starts came in at 39.1% y/y vs. 1.0% expected and 2.4% in February. Headwinds on the economy are expected to pick up as the tariffs bite and global growth slows.
Australia CPI data ran a little hot. Monthly headline came in a tick higher than expected at 2.4% y/y and was steady from February. Elsewhere, the Q1 CPI print came in a tick higher than expected at 2.4% and was steady from Q4, while the policy-relevant trimmed mean CPI came in a tick higher than expected at 2.9% vs. a revised 3.3% (was 3.2%) in Q4. Trimmed mean is tracking slightly above the RBA’s 2.7% projection and argues for a cautious easing cycle. The market has fully priced in a 25 bp cut at the next meeting May 20 but no longer sees any odds of a larger 50 bp move. Looking ahead, the swaps market is still pricing in 125 bp of total easing over the next 12 months.
April New Zealand ANZ business confidence index softened. Headline confidence came in at 49.3 vs. 57.5 in March, while expected own activity came in at 47.7 vs. 48.6 in March. Reported past activity, which has the best correlation to GDP, improved 10 points to 11, indicative of a recovery in economic activity. At its April 8 meeting, the RBNZ cut rates 25 bp to 3.50% and noted it “has scope to lower the OCR further as appropriate.” The swaps market is pricing in 75 bp of total easing over the next six months that would see the policy rate bottom near 2.75%. The risk is the RBNZ slashes rates further towards the lower end of its 2-4% neutral range estimate.
China reported soft April PMIs. Official manufacturing PMI came in at 49.0 vs. 49.7 expected and 50.5 in March, while non-manufacturing came in at 50.4 vs. 50.6 expected and 50.8 in March. As a result, the official composite came in at 50.2 vs. 51.4 in March and was the lowest since January. Caixin reported its manufacturing PMI at 50.4 vs. 49.7 expected and 51.2 in March. It reports services and composite PMIs next week. The impact of the trade war is starting to be felt by China but we do not believe it will back down or soften its stance anytime soon. However, expect more stimulus measures in the coming weeks.
Bank of Thailand cut rates 25 bp to 1.75%, as expected. The bank said “The US trade policies and potential retaliations from major economies will cause significant changes in the global economic, financial, and trade landscape. The Thai economy is projected to expand at a slower pace than anticipated, with more downside risks due to uncertainty in major economies’ trade policies and a decline in the number of tourists.” Assistant Governor Sakkapop added “Monetary policy needs to be more accommodative. We have shifted our policy stance to easing.” Given this dovish guidance, the swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.25%.
