• March retail sales data were strong; Q1 growth remains robust; the soft landing is turning into no landing; Powell’s speech this afternoon has taken on greater significance; Fed speakers sent mixed signals yesterday; Canada highlight will be March CPI
  
• The ECB is signaling it will cut rates in June; Germany reported firm April ZEW survey; U.K. reported mixed labor market data; incoming BOE Deputy Governor Lombardelli sounded cautious
  
• Japan jawboning is getting a bit stale; China reported mixed real sector data; US-China spreads are making new highs in favor of the dollar

The dollar is trading higher in the wake of strong retail sales data. DXY traded at a new cycle near 106.437 earlier today but has since drifted lower to 106.266 currently. It remains on track to test the November 1 high near 107.113. The euro is trading flat near $1.0625 but the clean break below $1.0755 sets up a test of the November 1 low near $1.0515. Elsewhere, sterling is trading flat near $1.2445 after mixed U.K. labor market data. USD/JPY traded at a new cycle high near 154.60 as jawboning becomes stale (see below). The dollar rally should continue as recent 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

March retail sales data were strong. Headline came in at 0.7% m/m vs. 0.4% expected and a revised 0.9% (was 0.6%) in February, while ex-autos came in at 1.1% m/m vs. 0.5% expected and a revised 0.6% (was 0.3%) in February. The so-called control group used for GDP calculations came in at 1.1% m/m vs. 0.4% expected and a revised 0.3% (was flat) in February. The y/y gains were impressive. Headline rose 4.0% vs. 2.1% in February and 0.2% in January, ex-autos rose 4.3% vs. 2.0% in February and 0.8% in January, and the control group rose 5.2% vs. 2.6% in both January and February. Control group was the strongest since February 2023. Overall, consumer spending remains resilient, supported by robust demand for labor and positive real wage growth.

Q1 growth remains robust. Official data will be out next week with consensus currently at 2.0% SAAR. However, the Atlanta Fed’s GDPNow model is now tracking Q1 growth at 2.8% SAAR and will be updated later today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 2.2% SAAR and Q2 growth at 2.6% SAAR and will be updated Friday. We think ongoing strength in the economy boils down to the U.S. labor market. As long as jobs are being created, both consumption and growth will remain strong, and firms will be able to pass on higher costs to consumers. When all is said and done, we suspect the Fed will discover that disinflation will stall out without significant weakening of the labor market.

Indeed, the soft landing is turning into no landing. Yet it's clear that the Fed doesn't want to hike rates again. Instead, we think the recent hawkish tone by most Fed officials is meant to encourage the market to do the tightening for them via higher yields. Financial conditions likely tightened last week for the first time since February (data out tomorrow) but more needs to be seen. And if equities fall as a result, so be it. There is no Fed put in place.

Powell’s speech this afternoon has taken on greater significance. In light of recent economic developments here in the U.S., his tone will be very important. As we always warn, there is always a significant risk that Powell makes a dovish slip in his comments. However, we expect him to maintain a more hawkish tone. This is his last speech before the media blackout begins at midnight Friday. We won’t hear from Powell again until his post-decision press conference on May 1 and so he really needs to set the right tone. As we noted above, we believe the Fed needs and wants the market to do the tightening for them. That means higher yields, which require a more hawkish Fed tone. Besides Powell, Jefferson, Williams, Barkin, and Collins also speak today.

Fed easing expectations continue to adjust as a result of the strong data. Odds of a June cut have fallen below 25% vs. 60% last week, while odds of a July cut have fallen to 55% vs. fully priced in last week. The market now sees the first cut coming in September and only 70% odds that we get a second cut in December vs. 85% at the start of this week. Yields at the short end of the U.S. curve continue to rise on revised Fed expectation, while yields at the long end continue to rise on elevated inflation risks. Both ends should resume rising, giving further fuel to the dollar rally.

Fed speakers sent mixed signals yesterday. Williams said, “We will need to start a process at some point to bring interest rates back to more normal levels, and my own view is that process will likely start this year.” He added that he didn’t view recent inflation data as a “turning point” but added that the data will affect his outlook and forecasts. This was perhaps a bit more dovish than necessary given what’s going on in the real economy. Elsewhere, Daly was mor cautious and said, “The worst thing we can do right now is act urgently when urgency isn’t necessary.” She added that “We’re in the ready position; we can respond as the economy evolves. The labor market’s not giving us any indication it’s faltering, and inflation is still above our target, and we need to be confident it is on path to come down to our target before we would feel the need - and I would feel the need - to react.”

Housing data will be closely watched. March building permits and housing starts will be reported and are expected at -0.9% m/m and -2.6% m/m, respectively. March existing home sales will be reported Thursday and are expected at -4.1% m/m vs. 9.5% in February. Yesterday, April NAHB housing market index came in steady as expected at 51.

Regional Fed surveys for April started rolling out. Empire manufacturing survey kicked things off yesterday and came in at -14.3 vs. -5.2 expected and -20.9 in March. New York Fed services index will be reported today and stood at 0.6 in March. Philly Fed manufacturing index will be reported Thursday and is expected at 2.3 vs. 3.2 in March. February IP will also be reported today and is expected at 0.4% m/m vs. 0.1% in January.

Canada highlight will be March CPI. Headline is expected to pick up a tick to 2.9% y/y. If so, it would reverse last month’s drop and move further above the 2% target. Core trim is expected to remain steady at 3.2% y/y, while core median is expected to fall a tick to 3.0% y/y. The Bank of Canada projects inflation to average 2.8% y/y in Q1 and 2.9% in Q2. Overall, disinflation continues, leaving room for the BOC to start easing as early as June. The market sees 55% odds of a 25 bp cut in June and becomes fully priced in July. Governor Macklem also holds a fireside chat today.

EUROPE/MIDDLE EAST/AFRICA

The ECB is signaling it will cut rates in June. Makhlouf said I’m hoping that we’re going to be much more confident about the data to feel that actually we can make a move in June.” Rehn said a June cut was possible but warned “This assumes there will be no further setbacks - for instance in the geopolitical situation and therefore in energy prices.” Rehn also acknowledged that “There is, for the moment, divergence in the economic cycle and development between U.S. and European economies, which means that naturally we may take different kinds of decisions in the coming period.” For now, three cuts are fully priced in this year, with around 20% odds of fourth cut vs. 50% at the start of this week. Villeroy and Vujcic speak later today.

Germany reported firm April ZEW survey. Expectations component came in at 42.9 vs. 35.5 expected and 31.7 in March and was the highest since February 2022. Current situation came in at -79.2 vs. -76.0 expected and -80.5 in March. Elsewhere, ZEW eurozone expectations came in at 43.9 vs. 33.5 and was also the highest since February 2022. Overall, the ZEW survey points to improving eurozone growth prospects, and helped the euro to firm up.

U.K. reported mixed labor market data. The unemployment rate rose to 4.2% for the three months through February vs. 4.0% expected. This was the highest reading since the three months through last August. Employment fell -156k for the same period and was the largest drop since the three months through last August. However, ongoing issues with the sample size of the Labour Force Survey means the unemployment rate estimate should be treated with additional caution.

Elsewhere, wage growth slowed less than forecast. This suggests the BOE can afford to stay on the sidelines for the time being. Total average weekly earnings came in steady at 5.6% y/y for the three months through February, while earnings ex-bonuses came in at 6.0% y/y vs. 5.8% expected and 6.1% previously. Sticky nominal wage growth and rising real wages suggest BOE interest rate expectations have room to adjust higher in favor of a firmer GBP.

Incoming BOE Deputy Governor Lombardelli sounded cautious. She noted during her testimony to the House of Commons Treasury Committee that loosening rates “is the direction of travel” but stopped short of saying when she will vote for lower rates. Lombardelli warned that disinflation “is likely to be bumpy as pricing behavior isn’t smooth and base effects will impact on the numbers.” Lombardelli will succeed Ben Broadbent and take up her 5-year term at the BOE on July 1st. Bank of England expectations have remained fairly steady. The market sees nearly 85% odds of an August BOE rate cut, with two cuts total seen in 2024. Governor Bailey speaks later today.

ASIA

Japan jawboning is getting a bit stale. Finance Minister Suzuki said “We are closely monitoring the latest developments. We are prepared to take all possible measures to respond to the situation if it is necessary.” Coming ahead of his trip to Washington for the annual International Monetary Fund meeting, as well as concurrent meetings of G-7 and G-20 Finance Ministers, Suzuki’s comments were quite tame and gave the green light to continue taking USD/JPY higher. The pair traded at a new high for this move near 154.60. While intervention risks are high now, we believe the risks will intensify on a break above 155.

China reported firm Q1 GDP data. Q1 GDP grew 1.6% q/q vs. 1.5% expected and a revised 1.2% (was 1.0%) in Q4, while the y/y rate came in at 5.3% vs. 4.8% expected and 5.2% in Q4.  However, there was notable weakness in the March data. March IP came in at 4.5% y/y vs. 6.0% expected and 7.0% in January-February while retail sales came in at 3.1% y/y vs. 4.8% expected and 5.5% in January-February.

US-China spreads are making new highs in favor of the dollar. USD/CNY should be trading much higher and eventually testing last fall's high near 7.35.