• U.S. yields should continue to rise; Fed easing expectations continue to adjust; Fed officials remain cautious; March PPI data were mixed; University of Michigan reports preliminary April consumer sentiment; Peru delivered a dovish surprise
  
• The ECB delivered the widely expected hold; Lagarde also stuck to the script; reports emerged that a larger group initial favored cutting rates at this meeting; the monthly U.K. data dump began; Sweden reported soft March CPI data
  
• Yen weakness has been limited by intervention fears; China reported weak March trade data; Singapore and Korea kept policy steady, both as expected

The dollar continues to firm ahead of the weekend. DXY is trading near 105.877, the highest since mid-November and nearing the November 10 high near 106. After that is the November 1 high near 107.113. The euro is trading lower near $1.0650 in the wake of the ECB decision (see below) and the clean break below $1.0755 sets up a test of the November 1 low near $1.0515. Elsewhere, sterling is trading lower near $1.2475 despite solid economic data (see below). USD/JPY traded at a marginal new high near 153.40 but the upside has been limited by continued jawboning and intervention concerns (see below). The dollar rally should continue as data confirm persistent inflation and robust growth in the U.S. The U.S. data continue to come in mostly firmer and should keep upward pressure on U.S. yields. We believe that while market easing expectations have adjusted violently after CPI, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

U.S. yields should continue to rise. The 2-year yield traded yesterday at the highest level since late November near 5.0%. Next level to watch is the November 13 high near 5.08%, but charts point to a test of the October 19 cycle high near 5.26%. The 10-year yield traded yesterday at the highest level since mid-November near 4.59%. Next level to watch is the November 13 high near 4.70% but clean break above 4.55% sets up a test of the October 23 high near 5.02%. The rise in yields at the short end reflects Fed repricing, while the rise at the long end reflects persistent inflation pressures. Yields are drifting lower today but given our constructive fundamental outlook for the U.S., both ends of the curve should continue to edge higher. In turn, this should lead to further dollar gains.

Growth remains robust. The New York Fed’s Nowcast model is tracking Q1 growth at 2.25% SAAR and Q2 growth at 2.6% SAAR and will be updated today. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.4% SAAR and will be updated Monday after the data. Financial conditions remain loose and so there is very little holding the economy back right now. The Fed will simply not be in any hurry to cut rates.

Fed easing expectations continue to adjust. Odds of a June cut have fallen to 25% vs. 60% pre-CPI, while odds of a July cut have fallen below 60% vs. 99% pre-data. The market now sees the first cut coming in September and only 75% odds that we get a second cut in December. Collins, Schmid, Bostic, and Daly speak today.

Fed officials remain cautious. Yesterday, Collins said “Overall, the recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience - recognizing that disinflation may continue to be uneven. This also implies that less easing of policy this year than previously thought may be warranted.” She added that the risks of policy being too tight have receded as policy may be less restrictive than expected. Barkin said “We’re not yet where we want to be” on inflation, adding that “The longer arc suggests we are headed in the right direction” and that “I think it is smart to take our time.” Williams said “There’s no clear need to adjust policy in the very near term. As we collect more data, we’ll be able to assess have we got that confidence that inflation is moving back to 2%.”

March PPI data were mixed. Headline came in a tick lower than expected at 2.1% y/y vs. 1.6% in February, while core came in a tick higher than expected at 2.4% y/y vs. a revised 2.1% (was 2.0%) in February. Of note, PPI ex-trade, transportation, and warehousing came in at 4.2% y/y vs. a revised 4.1% (was 4.2%) in February. This measure feeds into the calculation of the policy relevant PCE inflation and remains way too high to suggest any meaningful drop in PCE.

University of Michigan reports preliminary April consumer sentiment. Headline is expected at 79.0 vs. 79.4 in March, with current conditions seen dropping to 81.3 and expectations seen rising to 78.0. The March headline reading was the highest since July 2021, driven by steady gains in both current conditions and expectations. This measure is at odds with recent softness seen in the Conference Board's consumer confidence measure. Lastly, 1-year inflation expectations are seen steady at 2.9%, while 5- to 10-year expectations are seen steady at 2.8%.

Peru delivered a dovish surprise. The central bank cuts rates 25 bp to 6.0% vs. an expected hold. It said that higher than expected March inflation was “transitory” and added “We project that annual inflation will continue its downward trend and converge gradually to the center of the target range in coming months.” This is a risky move, coming at a time of heightened Fed hawkishness. PEN is the third best performer YTD in EM FX, behind only MXN and COP. However, those other two have much higher carry. If the interest rate differential with the U.S. narrows too much, the sol is likely to come under greater pressure, which in turn will feed into higher inflation.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank delivered the widely expected hold. The bank stuck to the script but appeared more confident about the disinflationary process and reinforces the case for a June rate cut. The ECB noted that “incoming information has broadly confirmed the Governing Council’s previous assessment of the medium-term inflation outlook.” It also maintained its PEPP portfolio reduction plan and reiterated that the policy rates will stay sufficiently restrictive for as long as necessary. The odds of a June cut rose to 90% after hovering around 80% since mid-February. Looking ahead, a total of three cuts this year are still priced in.

President Lagarde also stuck to the script. Lagarde all but confirmed the start of the easing cycle in June. However, she did not offer any fresh insights about the pace of easing. Lagarde re-emphasized the message from the policy statement that if disinflation continues, it would be appropriate to reduce the current level of monetary policy restriction. She stressed that “we are not going to wait until everything goes back to 2%” to make a policy decision. Lastly, Lagarde noted that a few members felt confident enough to back a rate cut but added that a very large majority of members wanted to wait for June.

Reports emerged that a larger group initial favored cutting rates at this meeting. However, some then joined the majority that favored waiting until the June meeting, as stronger than expected inflation in the U.S. made ECB policymakers more cautious. Reports suggested this group may have been trying to set the table for back-to-back cuts in June and July. Indeed, Stournaras continues to push for four cuts this year.

The monthly U.K. data dump began. GDP came in as expected at 0.1% m/m vs. a revised 0.3% (was 0.2%) in January, IP came in at 1.1% m/m vs. flat expected and a revised -0.3% (was -0.2%) in January, services a tick higher than expected at 0.1% m/m vs. a revised 0.3% (was 0.2%) in January, and construction came in at -1.9% m/m vs. -0.4% expected 1.1% in January. The firmer data suggest that the U.K. economy is on track to recover quickly from its end-2023 technical recession.

Bank of England expectations have remained fairly steady. The first cut is fully priced in for August, with two cuts total seen in 2024. The bank releases a report later today on its economic forecasting by former Fed Chair Bernanke. Governor Bailey has said that he expects the bank to drop its so-called fan charts in favor of a new regime.

Sweden reported soft March CPI data. Headline came in at 4.1% y/y vs. 4.4% expected and 4.5% in February, CPIF came in at 2.2% y/y vs. 2.6% expected and 2.5% in February, and CPIF ex-energy came in at 2.9% y/y vs. 3.2% expected and 3.5% in February. CPIF was the lowest since July 2021 and moves closer to the 2% target. At the last meeting March 27, the Riksbank delivered a dovish hold as it indicated “that the policy rate can be cut in May or June if inflation prospects remain favorable.” We believe the CPI data cements a May cut. Of note, the market now sees 80% odds of a cut then vs. 45% at the start of this week. Looking ahead, the market is pricing in 75-100 bp of total easing over the next year.

ASIA

Yen weakness has been limited by intervention fears. USD/JPY has edged up slightly to trade today near 153.40. The BOJ could check rates or intervene at any time, even during North American hours. That said, this is really a dollar move, not a yen move, and so any intervention impact is likely to be limited until the hawkish Fed story recedes.

China reported weak March trade data. Exports came in at -7.5% y/y vs. -1.9% expected and 5.6% in February, while imports came in at -1.9% y/y vs. 1.0% expected and -8.2% in February. This was the weakest reading for exports since August and suggests the recovery for China will be quite bumpy this year. Q1 GDP data will be released next Tuesday, with growth expected at 4.9% y/y vs. 5.2% in Q4.

Monetary Authority of Singapore kept policy steady, as expected. The slope, width, and center of its S$NEER trading band were left unchanged. The MAS noted that “The Singapore economy is expected to strengthen over 2024, with growth becoming more broad-based. The slightly negative output gap is projected to narrow further in H2 2024, even as underlying inflationary pressures gradually dissipate. MAS Core Inflation is likely to remain elevated in the earlier part of the year but should stay on its broadly moderating path and step down in Q4, before falling further into 2025. Accordingly, current monetary policy settings remain appropriate.” Advance Q1 GDP data was reported at the same time and growth came in at 0.1% q/q vs. 0.5% expected and 1.2% in Q4. The y/y rate came in at 2.7% vs. 3.0% expected and 2.2% in Q4. We believe the MAS is being a bit too optimistic about the growth outlook and is likely to ease policy in H2.

Bank of Korea kept rates steady at 3.5%, as expected. The bank tweaked its statement to say that it would keep its restrictive stance for a “sufficient” period vs. a “sufficiently long” period previously. Governor Rhee said that a rate cut in H2 “can’t be ruled out” if inflation slows sufficiently. The swaps market implies a small probability of a rate cut over the next 6 and 12 months. Similar to many other countries in EM, we believe currency weakness is complicating matters for the central bank. USD/KRW is trading at the highest since November 2022 and the break above 1357.50 sets up a test of the October 2022 high near 1445.