The dollar remains under severe pressure in the wake of the tariff announcement. DXY is trading lower near 101.35, the lowest since early October, as markets give a thumbs down to the reciprocal tariff announcement (see below). DXY is on track to test the September low near 100.155. USD/JPY is trading lower near 146.60, the lowest since early October. Elsewhere, both the euro and sterling are trading largely unchanged near $1.1065 and $1.3165, respectively. With questions arising of how the tariffs were calculated, we suspect some of this dollar weakness is due to a growing loss of confidence in U.S. policymakers (see below). If so, this confidence will be very hard to regain no matter how the U.S. data come in. Today’s highlight will be ISM services PMI. Stay tuned.
AMERICAS
Reciprocal tariffs were finally announced. The initial market reaction was positive as President Trump announced reciprocal tariffs starting at a 10% baseline that become effective April 5. The fireworks began as the country-specific tariffs were revealed to be much higher and become effective April 9. Of note, reciprocal tariffs on China (13% share of U.S. imports) will be at 34%, the EU (19% share) at 20%, and Japan (5% share) at 24%. It was later reported that the tariff rate on China would actually be 54%, as the 34% reciprocal tariffs would be on top of the existing 20%.
Questions have arisen on how the reciprocal tariffs were calculated. Reports have emerged that the country-specific tariffs were based on very simple methodology that had little to do with any tariffs and trade barriers that are actually in place on U.S. exports. Rather, it appears that they were calculated by taking the U.S. trade deficit with each country and dividing it by total U.S. imports from that country. It’s a bit early to say but we suspect some of this dollar weakness is being driven by a growing loss of confidence in U.S. policymaking.
Retaliation is coming. China, the EU, and other countries pledged counter measures on the U.S. However, Treasury Secretary Scott Bessent warned “I wouldn’t try to retaliate…As long as you don’t retaliate, this is the high end of the number.” Stay tuned. In the meantime, global stock markets are plunging and bonds are rallying. The trade war is a major blow to the global economy and can further weigh on risk assets in the near-term. Oil prices are down nearly 5% on the prospects of weaker global growth.
March ISM services PMI will be the highlight. Headline is expected at 52.9 vs. 53.5 in February. Keep an eye on prices paid, which is expected at 63.1 vs. 62.6 in February, as well as employment, which is expected at 53.0 vs. 53.9 in February. The regional Fed services surveys suggest risks are skewed to the downside. On the other hand, the S&P Global services PMI increased 3.3 points to a three-month high of 54.3 in March.
ADP private sector jobs estimate was strong. Headline came in at 155k vs. 120k expected and a revised 84k (was 77k) in February. Bloomberg consensus for NFP this Friday is at 140k while its whisper number stands at 120k. Given ongoing signs of strength in other labor market indicators, we lean more towards the former than the latter. For reference, payroll job gains averaged 168k per month over the past 12 months while the breakeven pace of job gains needed to keep the unemployment rate stable is between 80-100k. Weekly jobless claims and March Challenger layoffs today will give more insight into the state of the labor market.
The growth outlook is diverging. The Atlanta Fed GDPNow model estimates Q1 at a whopping -3.7% SAAR and will be updated today after the data. When adjusted for trade in gold, it improves to -1.4% SAAR. Elsewhere, the New York Fed Nowcast model estimates Q1 growth at 2.9% SAAR and Q2 growth at 2.6% SAAR and will be updated tomorrow. Due to different statistical methodology, the Atlanta Fed model tends to react more to individual data points and is more volatile than the New York Fed model. Q1 has drawn to a close but we won’t get official GDP data until April 30.
February trade data will be in focus. A deficit of -$123.5 bln is expected vs. -$131 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 an aggressive 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.
Fed officials remain on hold. Kugler said “I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable. Going forward, I will carefully assess incoming data, the evolving outlook and changes in the balance of risks.” Jefferson and Cook speak today. Powell speaks tomorrow and he will surely be grilled about his claim that tariff-related inflation will be transitory. With recession fears rising, the swaps market now pricing in 100 bp of easing over the next 12 months.
Canada also reports March PMIs. S&P Global services and composite PMIs will be reported today. All three of its PMIs have fallen below 50 and are at odds with the much higher Ivey PMI. We suspect the latter will converge to the former, though Ivey PMI won’t be reported until next Tuesday.
EUROPE/MIDDLE EAST/AFRICA
ECB publishes its account of the March 5-6 policy meeting. At that meeting, the ECB delivered on expectations and cut rates 25 bp to 2.50%. Importantly, the ECB stressed that “monetary policy is becoming meaningfully less restrictive” suggesting the bulk of easing is done. President Lagarde noted “the decision was a consensus, and no one opposed that decision” and added that only Holzmann, a staunch hawk, abstained. However, markets are pricing in nearly 90% odds of a 25 bp cut to 2.25% at the next meeting April 17. We fully expect the ECB to deliver a cut next month to preempt the drag to growth from U.S. tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to cut rates more aggressively than is currently priced in. That said, the swaps market is now pricing in 75 bp of total easing over the next 12-months vs. 50 bp at the start of this week.
Final March eurozone services and composite PMIs were reported. Headline readings both improved from the preliminary to 51.0 and 50.9, respectively. Looking at the country breakdown, the German composite improved four ticks from the preliminary to 51.3 and the French composite improved a full point to 48.0. Italy and Spain reported for the first time and their composite PMIs worsened noticeably to 50.5 and 54.0, respectively.
U.K. March DMP inflation expectations rose. 1-year expectations came in higher than expected and picked up three ticks to 3.4%, the highest since January 2024. Elsewhere, 3-year expectations also picked up three ticks to 3.0% in February, the highest since November 2023. Both series are moving further above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path. However, the swaps market is pricing in 75 bp of total easing over the next 12 months vs. 50 bp at the start of this week.
Switzerland reported March CPI data. Headline came in a tick lower than expected and was steady at 0.3% y/y while core came in as expected and was steady at 0.9% y/y. Both were in line with the Swiss National Bank’s projections. At its last meeting March 19, the SNB cut rates 25 bp to 0.25% but hinted at little appetite for more easing. President Schlegel highlighted that “this rate cut has an expansionary impact…In that sense, the probability of additional policy easing is naturally lower.” Still, the swaps market is pricing in one last 25 bp cut over the next 12 months that would take the policy rate to zero.
ASIA
Reserve Bank of Australia published its semi-annual Financial Stability Review. The bank warned that “If downside risks to the global outlook materialize, they could spill over to some Australian businesses via trade linkages or tighter access to offshore funding markets.” However, the RBA added that “Nevertheless, the strong financial positions of most households, businesses and owners of commercial real estate are likely to limit the risk of widespread financial stress.” This is similar in tone to the previous FSR.
Caixin reported firm March services and composite PMIs. Services came in at 51.9 vs. 51.5 expected and 51.4 in February, while the composite came in at 51.8 vs. 51.5 in February. This was the highest composite reading since November. The improvement mirrors that of the official PMIs reported at the start of this week. Manufacturing came in a tick higher than expected at 50.5 vs. 50.2 in February, while non-manufacturing came in two ticks higher than expected at 50.8 vs. 50.4 in February. As a result, the composite rose three ticks to 51.4. The economic data have been stabilizing in recent months but the cautious nature of stimulus measures seen so far argue against a strong rebound in 2025.
