- Fed officials remain cautious; consumer confidence plunged in March; the growth outlook remains mixed; the tariff noise continues
- U.K. reported soft February CPI data; Chancellor Reeves will deliver the Spring Budget Statement shortly; Riksbank published minutes from the March meeting; CNB is expected to keep rates steady at 3.75%
- BOJ Governor Ueda spoke; Australia reported soft February CPI data
The dollar is trading firmer as markets await fresh drivers. DXY is trading higher near 104.285 and has reversed yesterday’s modest losses. USD/JPY is trading higher near 150.20 after BOJ Governor Ueda’s cautious comments (see below). Sterling is underperforming and trading lower near $1.29 after softer than expected CPI data and ahead of the budget statement (see below), while the euro is trading flat just below $1.08. While weak consumer confidence is a big concern, other signs of life in the U.S. economy make us feel vindicated in not pushing the panic button earlier this year. If the hard data continue to stabilize, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed should come back into vogue. 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).
AMERICAS
Fed officials remain cautious. Kugler said “I am paying close attention to the acceleration of price increases and higher inflation expectations, especially given the recent bout of inflation in the past few years.” She added that “The committee can react to new developments by holding at the current rate for some time as we closely monitor incoming data and the cumulative effects of new policies.” Elsewhere, Goolsbee cautioned that the Fed is no longer on the “golden path” as was witnessed in 2023 and 2024. Goolsbee added “there’s a lot of dust in the air” and “wait and see is the correct approach when you face uncertainty.” The comments are in line with the Fed’s “no hurry to resume easing” script. Two cuts are currently priced in (July and October), with around 60% odds of a third one in 2026. Kashkari and Musalem speak today.
Conference Board consumer confidence plunged in March. Headline came in at 92.9 vs. 94.0 expected and a revised 100.1 (was 98.3 in February). This was the lowest since January 2021 and moves below the rather narrow range that’s held throughout the past several years. Present situation fell to 134.5 vs. a revised 138.1 (was 136.5) in February, while expectations plunged to 65.2 vs. a revised 74.8 (was 72.9) in February. Expectations were the lowest since March 2013 and, remarkably, lower than anything seen during the pandemic. University of Michigan reports its final March consumer sentiment Friday. While retail sales were soft in both January and February, some of that weakness was weather-related and so it may take months before we get a clean read on how consumer sentiment is impacting consumption. Stay tuned.
The labor market appears to be stabilizing. The Conference Board’s labor index (jobs plentiful minus jobs hard to get) improved slightly to 17.9 vs. 17.6 in February, but the overall trend continues to show that consumers are less optimistic about future labor market conditions. After a brief spike to 242k in February, initial jobless claims have quickly fallen back to stand at 223k currently. Bloomberg consensus for March NFP is currently at 120k vs. 151k in February, but its whisper number stands at only 56k.
The growth outlook remains mixed. The Atlanta Fed GDPNow model estimates Q1 growth at -1.8% SAAR and will be updated today after the durable goods data (-1.0% m/m expected). 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 be updated Friday. Of note, we get the final revision to Q4 GDP data tomorrow, with growth expected to remain steady at 2.3% SAAR.
The tariff noise continues. Reports suggest the U.S. is poised to impose tariffs on copper within several weeks. If so, this would be much sooner than expected after Trump ordered a review last month that would take up to 270 days to complete. Copper prices are soaring to fresh highs, and dragging CLP up along the way, as buyers scramble to front-run tariffs. Chile is by far the top supplier of refined copper to the U.S., accounting for over 70% of imports in 2024. Elsewhere, President Trump said that with regards to reciprocal tariffs planned for next Wednesday, “I know there are some exceptions, and it’s an ongoing discussion, but not too many, not too many exceptions. No, I don’t want to have too many exceptions.” The back and forth has become dizzying, but market reactions to tariff headlines seem to have ebbed in recent days.
EUROPE/MIDDLE EAST/AFRICA
U.K. reported soft February CPI data. Headline CPI came in two ticks lower than expected at 2.8% y/y vs. 3.0% in January, core CPI came in a tick lower than expected at 3.5% y/y vs. 3.7% in January, and CPIH came in a tick lower than expected at 3.7% y/y vs. 3.9% in January. Of note, services CPI came in a tick higher than expected and was steady at 5.0% y/y. Odds of a 25 bp cut at the May 8 meeting rose to 75% vs. 60% before the data. In our view, diminishing likelihood that the U.K. enters a period of stagflation is sterling-supportive and suggests cable will hold above its 200-day moving average currently near $1.2800.
Chancellor of the Exchequer Reeves will deliver the Spring Budget Statement shortly. Reeves is expected to turn to public spending reduction rather than tax hikes to balance the books. Also, gilt issuance for the 2024/2025 financial year is forecast to be raised GBP10 bln to near a record sum of GBP310 bln. The fiscal backdrop is not pretty. Borrowing in the first eleven months of the 2024-25 financial year totaled GBP132.2 bln, reflecting both higher spending and lower tax receipts. This was GBP14.7 bln more than at the same point in the last financial year and the third highest financial year-to-February borrowing since monthly records began in 1993. It’s also GBP20.4 bln above the monthly profile consistent with the Office for Budget Responsibility’s forecast.
Riksbank published minutes from the March meeting. At last week’s meeting, the bank kept rates steady at 2.25% and signaled it was done easing. The minutes confirmed that all executive board members supported the proposal to leave the policy rate and policy rate path unchanged. As with other central banks, trade policy uncertainty dominated the conversation among Riksbank policymakers. The swaps market has moved in line with Riksbank guidance and is no longer pricing in one last 25 bp cut.
Czech National Bank is expected to keep rates steady at 3.75%. At the last meeting February 6, CNB cut rates 25 bp to 3.75%, as expected. It was a hawkish cut, however, as Governor Michl warned that “Economic growth will be driven mainly by household consumption and government debt. Both of these factors are inflationary and a risk for inflation going forward. That’s why the bank board must be very careful about further interest rate cuts.” Despite the hawkish guidance, the swaps market is pricing in nearly 50 bp of easing over the next 12 months.
ASIA
Bank of Japan Governor Ueda spoke. He reiterated the bank’s guidance that it will continue to raise rates if its economic outlook is realized. Ueda cautioned again that the underlying price trend is still below the BOJ’s 2% inflation target, signaling that the bar is high for the bank to dial up the pace of rate hikes. As such, the BOJ is unlikely to tighten policy by more than is currently priced in. The swaps market continues to see about 50 bp of tightening over the next 12 months. Unless BOJ rate hike expectations soften significantly, we believe USD/JPY is unlikely to sustain a break above key resistance at its 200-day moving average currently near 151.70.
Australia reported soft February CPI data. Headline came in a tick lower than expected at 2.4% y/y vs. 2.5% in January, while trim mean also slowed a tick to 2.7% y/y. The monthly readings are in line with the RBA’s Q2 forecast. It’s worth noting that the RBA focuses on the quarterly CPI prints because it’s less volatile and captures more items than the monthly CPI indicator. The market continues to fully price in the next 25 bp cut in July, with nearly 70% odds that it will occur at the May meeting.
