The dollar is firm ahead of PCE data. DXY is trading higher near 104.422 as some risk off impulses build. The yen is the best performer, with USD/JPY trading lower near 150.70 and helped by higher than expected Tokyo inflation in March (see below). Sterling is also outperforming on stronger than expected retail sales data (see below) and trading higher near $1.2945, while the euro is trading lower near $1.0775 as March CPI readings from France and Spain softened. More Fed officials are not convinced that tariff-related inflation is transitory (see below), which sets up the possibility that U.S. rates will stay even higher for longer. Global March PMI readings suggest that U.S. exceptionalism is back in play, but next week brings a slew of key data that culminates in March jobs data Friday (see below). Today, the focus will be on PCE and personal spending data.
AMERICAS
February PCE data will be the highlight. Headline is expected to remain steady at 2.5% y/y while core is expected to pick up a tick to 2.7% y/y. The Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.4% and 2.6%, respectively. Looking ahead, that model estimates March headline and core at 2.1% and 2.5%, respectively. The median FOMC forecast for 2025 headline PCE inflation was raised two ticks to 2.7%, while core PCE inflation was raised three ticks to 2.8%. According to Powell, “a good part” of the marked-up inflation comes from the expected impact from tariffs. The big question is whether this inflation is transitory, as he currently believes.
Personal income and spending data will be reported at the same time. Personal income is expected at 0.4% m/m vs. 0.9% in January. Meanwhile, personal spending is expected to recover after being negatively affected by the cold weather in January, with nominal spending expected at 0.5% m/m vs. -0.2% in January and real spending expected at 0.3% m/m vs. -0.5% in January. The mixed February retail sales report and plunging consumer confidence suggest softer consumer spending activity ahead.
More Fed officials are acknowledging that tariff-related inflation may not be transitory. Barkin said “I’m open to the notion of it, but I don’t start with an assumption that this is a one-time increase in the price level that you simply look through.” Elsewhere, Colins said “It looks inevitable that tariffs are going to increase inflation in the near term. My kind of modal outlook would be that that could be short-lived with a continuation of some disinflation, but further in the future than I might have expected before. But there are risks around that, and depending on how things unfold, it may be more persistent and a larger increase.” This is a much more cautious take than Powell’s transitory claim. Barr and Bostic speak today.
Trade remains a drag on growth. The advance February goods trade deficit came in at -148 bln vs. -$139 bln expected and -$156 bln in January. Trade data have become more important in recent weeks, for two reasons. First, the Trump administration’s focus on narrowing the trade deficit is driving tariff policy. Second, recall that an unusually large deficit (due to gold imports) in January caused the Atlanta Fed GDPNow model to forecast a contraction in Q1 GDP. This headwind seems to have carried over into February and may get worse as importers front-run existing and upcoming tariffs.
The growth outlook remains mixed. The Atlanta Fed GDPNow model estimates Q1 growth at -1.8% SAAR and will be updated today after the data. This update will include the growth estimate adjusted for foreign trade in gold. Elsewhere, the New York Fed Nowcast model is tracking Q1 growth at 2.7% SAAR and Q2 growth at 2.6% and will also be updated today. Of note, final Q4 GDP growth was revised up a tick to 2.4% SAAR. Personal consumption contributed 2.7 ppt to headline growth vs. 2.8 previously, but this was more than offset by net exports contributing 0.3 ppt vs. 0.1 ppt previously. Given the large trade deficits posted so far in Q1, we suspect net exports will be a big drag on growth going forward. What category will pick up the slack?
The labor market still appears to be in solid shape. Initial claims came in at 224k vs. 225k expected and a revised 225k (was 223k) the previous week, while the four-week average fell to 224k vs. 229k the previous week. Continuing claims are reported with a one-week lag and are for the BLS survey week containing the 12th of the month; these fell to 1.856 mln vs. 1.886 mln expected and a revised 1.881 mln (was 1.892 mln) the previous week. Bloomberg consensus for NFP at 135k while its whisper number stands at 87k. We lean more towards the former than the latter.
Canada reports January GDP data. In December, Statistics Canada advance information indicated that real GDP by industry increased 0.3% m/m after rising 0.2% in December. The February GDP estimate will be published at the same time today and will likely point to deteriorating economic activity. Bank of Canada Governor Macklem warned that the pervasive uncertainty of U.S. trade policy is “already causing harm” to the Canadian economy. However, with both headline and core CPI inflation tracking above the BOC’s Q1 projection, the bank has limited room to ease policy further to offset the drag to growth from heightened trade policy uncertainty. Markets are pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 2.25%.
Banco de Mexico cut rates 50 bp to 9.0%, as expected. The decision was unanimous vs. a split 4-1 vote for the 50 bp cut at the previous meeting February 6. The bank said more cuts of “similar magnitude” are possible while noting that “The changes in economic policy by the new U.S. administration have added uncertainty to the forecasts. Its effects could imply inflationary pressures on both sides of the balance.” Given these dovish signals, the swaps market is now pricing in a terminal rate of 7.25% vs. 7.75% before the decision. We suspect concerns about the impact of U.S. tariffs is also playing a bit part in this repricing.
EUROPE/MIDDLE EAST/AFRICA
Eurozone March CPI data so far have softened. Spain’s EU Harmonised inflation came in at 2.2% y/y vs. 2.5% expected and 2.9% in February, while France’s came in at 0.9% y/y vs. 1.1% expected and 0.9% in February. Spain is one of the only eurozone countries to report core inflation and it came in at 2.0% y/y vs. 2.1% expected and 2.2% in February. Germany and Italy report this coming Monday and their EU Harmonised inflation readings are expected at 2.5% and 2.0% y/y, respectively. Eurozone-wide CPI will then be reported this coming Tuesday, with headline and core expected at 2.3% y/y and 2.5% y/y, respectively.
ECB February inflation expectations were steady. 1-year expectations were flat at 2.6% while 3-year expectations were flat at 2.4%. With longer-term inflation expectations still well anchored around 2%, the ECB has scope to deliver on market expectations for 50 bp of easing over the next 12 months. Recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live. We expect the ECB to deliver a cut next month to pre-empt the drag to growth from US tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates more than is currently priced in.
U.K. February retail sales data were firm. Retail sales ex-auto fuel came in at 1.0% m/m vs. -0.5% expected and a revised 1.6% (was 2.1%) in January, while headline came in at 1.0% m/m vs. -0.4% expected and a revised 1.4% (was 1.7% in January). The details were good and suggests underlying consumer spending activity is picking up. Non-food stores - the total of department, clothing, household and other non-food stores - accounted for all the pick-up in retail sales, while food stores fell. In our view, low odds that the U.K. enters a period of stagflation suggests GBP/USD will hold above its 200-day moving average near $1.2805 currently.
U.K. also reported some Q4 data. The final Q4 GDP print confirmed the economy grew 0.1% q/q following a similar rise in Q3. Meanwhile, the current account deficit, excluding volatile precious metals trade, widened to -2.6% of GDP vs. -2.0% in Q3. Attracting foreign savings to finance this deficit is not really an issue, especially with GBP trading at a deep discount to fundamental equilibrium. Our PPP model estimates GBP/USD fundamental equilibrium at around 1.5000.
ASIA
Bank of Japan released the summary of opinions from the March 18-19 meeting. At last week’s meeting, the bank delivered the expected hold and still sounded cautious. The decision was unanimous and yet the opinions expressed were definitely mixed. One board member noted the need for caution in case the economy was hit by U.S. trade policies, while one member said downside risks are rising rapidly. However, one member said uncertainties don’t always mean that the bank needs to stay on hold, while one said the bank might need to make a bold call depending on the situation. Lastly, one member said more time was needed to assess the impact of the January hike. We believe the summary of opinions reinforce market pricing for a BOJ terminal rate around 1.25% over the next two years, with the next 25 bp hike priced in for September.
March Tokyo CPI data ran hot. Headline came in two ticks higher than expected at 2.9% y/y vs. a revised 2.8% (was 2.9%) in February, core (ex-fresh food) came in two ticks higher than expected at 2.4% y/y vs. 2.2% expected and actual in February, and core ex-energy came in three ticks higher than expected at 2.2% y/y vs. 1.9% expected and actual in February. Tokyo core moved further above the 2% target and does not bode well for the national CPI readings due out April 18.
New Zealand March ANZ consumer confidence was disappointing. Consumer confidence dipped 3.4 points to a five-month low of 93.2 and remains below long-run average of 113.5. Additionally, the proportion of households thinking it’s a good time to buy a major household item, the best retail indicator, eased 1 point to -16, matching the January low. Bottom line: the RBNZ has room to deliver additional easing, which is an ongoing headwind for NZD. RBNZ has penciled in another 75 bp of easing over the next 12 months that would see the policy rate bottom at 3.00%. This is roughly in line with market pricing.
