• Tariffs remain in play; Fed officials are acknowledging the potential impact of Trump policies; January PCE data will be the highlight; personal income and spending will be reported at the same time; Canada reports GDP data; Peru reports February CPI data Saturday
  
• Eurozone preliminary February CPI data continue to roll out; ECB account of its January meeting shows the internal debate remains ongoing; ECB inflation expectations for January eased; U.S. and U.K. are in talks on a trade deal that could spare the U.K. from tariffs
  
• February Tokyo CPI data cooled; January real sector data were mostly firmer; China reports official February PMIs Saturday

The dollar continues to firm as tariff threats intensify. DXY is trading higher for the third straight day near 107.403 after President Trump said the 25% tariffs on Canada and Mexico will go into effect next week, along with an additional 10% tariff on China (see below). The yen is underperforming again, with USD/JPY near 150.50 after trading as low as 148.50 earlier this week. The euro is trading lower just below $1.04, while sterling is trading just below $1.26. Recent softness in the U.S. data is concerning, but we are not ready to push the panic button yet. If the data continue to soften, however, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will be called into question. For now, tariff threats are dominating and that is likely to keep the dollar firm.

AMERICAS

Tariffs remain in play. President Trump announced yesterday that the 25% tariffs on Canada and Mexico (with a reduced 10% rate for Canadian energy) would come into force starting March 4 as previously planned. He also announced another 10% tariff on China, on top of a previous 10% duty that took effect in early February. A spokesperson for the Chinese Ministry of Commerce warned today “if the US insists on having its own way, China will counter with all necessary measures to defend its legitimate rights and interests.” Lastly, Trump said that “The April Second Reciprocal Tariff date will remain in full force and effect.” We remain puzzled as to why markets would be surprised by this tariff news. Tariffs are coming. Period.

Fed officials are acknowledging the potential impact of Trump policies. Barkin said “The firing on the government side is real. It’s happening.” Barkin added that the federal government accounts for 2% of the national workforce, while the “contract workforce” accounts for about 4%. We have seen other estimates that suggest for every one federal worker fired, two contractors will be impacted. Elsewhere, Schmid said “While the risks to inflation appear to be to the upside, discussions with contacts in my district, as well as some recent data, suggest that elevated uncertainty might weigh on growth. This presents the possibility that the Fed could have to balance inflation risks against growth concerns.”

Other officials continue to focus on inflation. Hammack said “I believe that monetary policy has the luxury of being patient as we assess the path forward, and this will likely mean holding the federal funds rate steady for some time.” Elsewhere, Harker said “The policy rate remains restrictive enough to continue putting downward pressure on inflation over the longer term, as we need it to, while not negatively impacting the rest of the economy.” Two cuts are still priced in for 2025 but the timing has been moved forward to July and October. Furthermore, Fed Funds futures are pricing in a third cut in 2026. Goolsbee speaks today.

January PCE data will be the highlight. Headline is expected to fall a tick to 2.5% y/y, while core is expected to fall two ticks to 2.6% y/y. if so, headline would decelerate for the first time since September but remain well above the 2% target. Of note, the Cleveland Fed’s Nowcast model sees headline and core at 2.5% and 2.7%, respectively. Looking ahead to February, this model sees headline and core at 2.4% and 2.6%, respectively.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.4% in December, while spending is expected at 0.2% m/m vs. 0.7% in December. Real personal spending is expected at -0.1% m/m vs. 0.4% in December. Spending data will be key and could confirm the weak retail sales data already reported.

Weekly jobless claims are worth discussing. Initial claims rose to 242k vs. 221k expected and a revised 220k (was 219k) the previous week. This was the highest reading since the first week of December. Back then, initial claims fell right back the next week but we’re not so sure that will happen this time. That said, we don't want to hit the panic button yet and will await further confirmation. Of note, Rhode Island and Massachusetts saw the biggest increases, initial claims in Washington DC rose to the highest since March 2023. However, initial claims filed by federal workers are not included in the headline number. Lastly, continuing claims were for the BLS survey week and came in at 1.862 mln vs. 1.871 mln expected and a revised 1.867 mln (was 1.869 mln) the previous week. Bloomberg consensus for February NFP next Friday stands at 158k, while its whisper number stands at 138k.

We got the first revision to Q4 GDP data. Growth was unchanged from the preliminary reading of 2.3% SAAR. As we noted before, the details were much stronger than the headline suggests. Personal consumption was unchanged at 4.2% SAAR and contributed 2.8 ppt to headline growth. Fixed investment subtracted -0.2 ppt vs. -0.1 ppt preliminary, government consumption added 0.5 ppt vs. 0.4 ppt, net exports contributed 0.1 ppt vs. 0.0 ppt, and inventories subtracted -0.8 ppt vs. -0.9 ppt. Private domestic demand rose a still-strong 3.0% SAAR vs. 3.2% preliminary.

Estimates for Q1 growth are mixed. The Atlanta Fed GDPNow model is tracking Q1 at 2.3% SAAR while the New York Fed Nowcast model is tracking 2.9% SAAR. Both models will be updated today. Of note, the New York Fed’s first estimate for Q2 will come next week.

February Chicago PMI will be reported. Headline is expected at 40.8 vs. 39.5 in January. However, this series has not correlated well with the national PMIs and so offers little insight into next week’s ISM PMIs. Of note, ISM manufacturing is expected at 50.5 vs. 50.9 in January, while ISM services is expected at 53.0 vs. 52.8 in January. If so, the readings would suggest the weak S&P Global PMIs already reported were a fluke. Stay tuned.

Canada highlight will be December and Q4 GDP. Statistics Canada advance information indicated that GDP by industry rose 0.2% m/m after falling -0.2% in November. The January GDP estimate will be published at the same time as the December data. The Bank of Canada projects real GDP by expenditure to rise 1.8% SAAR in Q4 vs. 1.0% in Q3, driven by consumer spending, residential investment, and net exports. Business investment is expected to remain subdued while inventory destocking is forecast to be the main drag to growth in Q4. Markets are pricing in nearly 50% odds of a 25 bp cut next month. Looking ahead, the swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 2.5%.

Peru reports February CPI data Saturday. Headline is expected at 1.47% y/y vs. 1.85% in January. If so, it would be the lowest since September 2018 and move closer to the bottom of the 1-3% target range. At the last meeting February 13, the bank left rates steady after cutting rates 25 bp to 4.75% at the January 9 meeting. It justified a more cautious stance by noting that “Uncertainty remains over the impact of trade policies, as well as risks derived from international conflicts.” Since last fall, the bank has been cutting rates at every other meeting and so we see potential for a 25 bp cut at the next meeting March 13. However, much will depend on the global backdrop then.

EUROPE/MIDDLE EAST/AFRICA

Eurozone preliminary February CPI data continue to roll out. France’s EU Harmonised inflation came in at 0.9% y/y vs. 1.1% expected and 1.8% in January, while Italy’s came in a tick higher than expected and was steady at 1.7% y/y. Germany reports later today and its EU Harmonised inflation is expected to fall a tick to 2.7% y/y. German state data already reported have been mixed. Yesterday, Spain’s EU Harmonised CPI was steady as expected at 2.9% y/y. All these will provide clues for the eurozone CPI data due out next Monday. Consensus sees headline falling two ticks to 2.3% y/y and core falling one tick to 2.6% y/y. Bottom line: the disinflation process continues and will allow the ECB to continue cutting rates.

The European Central Bank account of its January meeting shows the internal debate remains ongoing. At that meeting, the ECB delivered a widely expected 25 bp cut to 2.75%. The account shows that “It was widely felt that even with the current deposit facility rate, it was relatively safe to make the assessment that monetary policy was still restrictive.” However, “It was argued that greater caution was needed on the size and pace of further rate cuts when policy rates were approaching neutral territory, in view of prevailing uncertainties.” Regarding inflation, “There was some evidence suggesting a shift in the balance of risks to the upside since December, as reflected, for example, in market surveys showing that the risk of inflation overshooting the target outweighed the risk of an undershooting.” However, “Risks to the growth outlook remained tilted to the downside, which typically also implied downside risks to inflation over longer horizons.”

ECB inflation expectations for January eased. 1-year expectations fell two ticks to 2.6% vs. 2.8% expected, while 3-year expectations were steady at 2.4% vs. 2.5% expected. With longer-term inflation expectations still well anchored around 2%, the ECB has scope to ease further to support the sluggish growth outlook. The swaps market is pricing in 75-100 bp of easing over the next 12 months that would see the policy rate bottom between 1.75-2.00%.

The U.S. and U.K. are in talks on a trade deal that could spare the U.K. from tariffs. Trump said “I think we could very well end up with a real trade deal where the tariffs wouldn’t be necessary.” This isn’t surprising as the U.K. is one of the few countries where the U.S. runs a trade surplus in goods and services. Meanwhile, U.K.-E.U. trade relations are warming up and could lead to a more favorable U.K. business investment outlook. Bottom line: closer U.S.-U.K. and E.U.-U.K. ties bode well for GBP versus EUR.

ASIA

February Tokyo CPI data cooled. Headline came in three ticks lower than expected at 2.9% vs. 3.2% in January, core (ex-fresh food) came in a tick lower than expected at 2.2% y/y vs. 2.5% in January, and core ex-energy came in a tick lower than expected and remained steady at 1.9% y/y. Tokyo core decelerated for the first time since October and bodes well for the national CPI data out March 21. Bank of Japan tightening expectations remained steady. The next hike is still priced in for September while the swaps market sees nearly 40% odds of another 25 bp hike that would see the policy rate peak near 1.25% vs. 1.0% previously.

January real sector data were mostly firmer. Retail sales came in as expected at 3.9% y/y vs. 3.5.% in December, IP came in at 2.6% y/y vs. -1.6% in December, and housing starts came in at -4.6% y/y vs. -2.7% expected and -2.5% in December. Overall, the economy is growing well enough for the Bank of Japan to maintain its modest tightening cycle.

China reports official February PMIs Saturday. Manufacturing is expected to rise nearly a full point to 49.9, while services is expected to rise two ticks to 50.4. If so, the composite should move further above the key 50 boom/bust level after it notched the lowest reading since August last month at 50.1. We remain skeptical of any true bounce in the numbers until policymakers address deflation risks brought about by the huge debt overhang and the bursting property bubble.