The dollar is trading flat despite the intensification of the trade war. DXY is trading flat near 104.50 and has given up its earlier gains after news of 25% auto reports was offset by less confrontational signals from President Trump (see below). The yen is the worst performer, with USD/JPY trading at the highest level since March 3 near 151 as Ishiba considers retaliation (see below). Sterling is outperforming as it stays out of the tariff spotlight for now and is trading higher near $1.2925, while the euro is trading higher in sympathy near $1.0775. Some Fed officials are not convinced that tariff-related inflation is transitory, 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 weekly jobless claims and advance goods trade data.
AMERICAS
President Trump announced tariffs on the auto industry. Specifically, he said “What we’re going to be doing is a 25% tariff on all cars that are not made in the United States.” The tariffs will go into effect April 2 and the White House said the tariff would apply not only to fully assembled cars but also automobile parts such as engines, transmissions, powertrains, and electrical components. Officials stressed that this list could be expanded to cover additional parts. Vehicles covered by the USMCA would be “given the opportunity to certify their U.S. content and systems will be implemented such that the 25% tariff will only apply to the value of their non-U.S. content.” Trump said the tariffs were “permanent” and that he is not interested in negotiating any exceptions. Lastly, Trump warned that “far larger tariffs than currently planned” will be placed on the EU and Canada if they work together “to do economic harm to the USA.”
This is an aggressive stance coming ahead of the reciprocal tariffs set to be announced next Wednesday. In keeping with the back and forth, Trump said that these tariffs would be “very lenient.” Of note, Treasury Secretary Bessent recently said that 15% U.S. trading partners impose high tariffs and other significant barriers to trade. He added that these countries would be the focus of the scheduled reciprocal tariff announcement April 2. A notice from the USTR shows that the trading partners with the greatest trade surpluses with the U.S. are being evaluated, including Brazil, Canada, China, the EU, India, Indonesia, Japan, Malaysia, Mexico, South Africa, South Korea, Switzerland, Taiwan, Thailand, Turkey, and Vietnam.
Some Fed officials remain wary of the tariff impact. Musalem said “I would be wary of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full ‘look-through’ strategy will necessarily be appropriate. I would be especially vigilant about indirect, second-round effects on inflation.” He added that if the impact of tariffs is persistent, the Fed may have to hold rates for longer. This is a very different stance than Powell, who seems confident that tariff-related inflation would be transitory. We lean more toward Musalem's stance and see upsides risks to inflation. Powell and others may be too sanguine and are really tempting fate by using the t-word. Elsewhere, Kashkari said the Fed has more work to do on lowering inflation. He added that tariffs are creating a dramatic shift in confidence. Barkin and Collins speak today.
Weekly jobless claims will be reported. Initial claims are expected at 225k vs. 223k the previous week. After a brief spike to 242k in February, initial jobless claims have quickly fallen back and so the labor market appears to be in solid shape. Bloomberg consensus for March NFP is currently at 120k vs. 151k in February, but its whisper number stands at only 69k. Continuing claims are for the BLS survey week containing the 12th of the month and are expected at 1.886 mln vs. 1.892 mln the previous week.
Advance February goods trade data will be in focus. A deficit of -$139 bln is expected vs. -$156 bln in January. Trade data has 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.
The growth outlook remains mixed. The Atlanta Fed GDPNow model is still tracking Q1 growth at -1.8% SAAR. However, when adjusted for distortions resulting from gold imports, it improves to 0.2% SAAR. Next update is this Friday after the data. Still, that is a far cry from the New York Fed Nowcast model, which has Q1 growth at 2.7% SAAR and will also be updated Friday. Of note, we get the final revision to Q4 GDP data today, with growth expected to remain steady at 2.3% SAAR.
Brazil reports mid-March IPCA inflation. Headline is expected at 5.30% y/y vs. 4.96% in mid-February. If so, it would be the highest since mid-March 2023 and would move further above the 1.5-4.5% target range. The central bank also publishes its quarterly inflation report. Last week, it hiked rates 100 bp to 14.25% and noted that “The current scenario is marked by additional de-anchoring of inflation expectations, high inflation projections, resilience on economic activity and labor market pressures, which requires a more contractionary monetary policy.” It added that it would likely deliver a smaller hike at the next meeting May 7. The swaps market is pricing in 125 bp of tightening over the next six months that would see the policy rate peak near 15.5%.
EUROPE/MIDDLE EAST/AFRICA
The ECB remains split. GC member Wunsch said “I’m not saying I’m pleading for a pause in April, but it’s certainly something that should be on the table.” On the other hand, GC member Kazaks said “we can probably hope for a gradual reduction in rates in the future.” Both expressed concerns about heightened global uncertainty. The market seems to side with Kazaks, as the odds of an April cut stand near 75%. Looking ahead, 50 bp of total easing is priced in over the next 12 months. Guindos, Villeroy, Escriva, and Schnabel also speak today.
U.K. Chancellor of the Exchequer Reeves delivered the Spring Budget Statement. The two key market relevant takeaways: 1) the fiscal drag is bigger and will not complicate the BOE’s job to bring down inflation. The cyclically adjusted budget deficit for 2025 is estimated at -1.2% of GDP vs. -0.8% of GDP in the Autumn statement; 2) total gilt sales in 2025/26 are forecast at GBP299.2 bln. This is roughly in line with the Autumn statement estimate of GBP299.6 bln and slightly below market consensus for GBP302 bln. We believe that the budget was neutral for GBP and gilts.
Norges Bank kept rates steady at 4.50%, as expected. The bank stressed that “a restrictive monetary policy is still needed to bring inflation down to target within a reasonable time horizon.” The expected policy rate path sees it at 4.00% by year-end vs. 3.75% previously, followed by a gradual decline to 3.00% by the end of 2028. Still, the Norges Bank cautioned that “the uncertainty surrounding the outlook is greater than normal, and the future path of the policy rate will depend on economic developments.” The swaps market is pricing in only 25 bp of easing over the next 12 months, followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom near 3.75%.
ASIA
Japan Prime Minister Ishiba wouldn’t rule out countermeasures against the 25% tariff on its car exports to the U.S. He said “We must consider appropriate responses and naturally, all options are on the table. The bottom line is that we must consider what will best serve the national interests of Japan.” Autos and auto parts account for about one-third of its nearly $150 bln of its annual exports to the U.S. Of note, USD/JPY is trading at the highest since March 3 near 151 and is nearing a test of that day’s high near 151.30. After that is the 200-day moving average that comes in near 151.65. That level coincides with the last major retracement objective of the February-March drop and so a break above sets up a test of the mid-February high near 154.80.
Reports suggest Trump would consider lowering tariffs on China in exchange for a deal on TikTok. We won’t go into the details but this is just another example of how the current administration is using tariffs for non-trade objectives. As a student of traditional international economics, we have always believed that tariffs typically result in sub-optimal outcomes for every country involved and should only be used sparingly.
