The dollar is trading sideways as tariff headlines hit the tapes. DXY is trading flat near 104.175, recouping earlier losses after reports of 20% tariffs planned for most U.S. imports (see below). The yen and Swiss franc are outperforming again, with USD/JPY trading lower near 149.45 and EUR/CHF trading lower near 0.95334. Both the euro and sterling are trading lower near $1.0805 and $1.2920, respectively. This is a huge week for the markets. Not only do we get a slew of key U.S. and eurozone data, but also perhaps some clarity on U.S. trade policy. There are also plenty of Fed speakers, culminating in Chair Powell’s speech Friday. Markets will be looking for confirmation that U.S. exceptionalism is over, but we are not so quick to bury this theme. Indeed, both the IMF COFER data and Riksbank rebalancing of reserves show that dollar dominance continues (see below). Today’s focus will be on ISM manufacturing PMI and JOLTS data.
AMERICAS
Dollar dominance continues, at least according to IMF data. In its latest quarterly Currency Composition of Official Foreign Exchange Reserves (COFER), the IMF reported that the dollar share of allocated reserves rose to 57.8% in Q4 2024 vs. 57.3% in Q3 2024. The dollar strengthened in Q4 against virtually every foreign currency, which pushed down the dollar value of non-dollar reserve holdings. Since the dollar was broadly weaker in Q1, we would expect the dollar share of allocated reserves to fall back again as the dollar value of non-dollar reserve holdings increase. Note that the dollar share of allocated reserves has declined steadily from 65.5% in Q1 2016 but it remains dominant, as the next largest share goes to the euro at 19.8% in Q4, down from 20.0% in Q3. After that is the yen share, steady at 5.8%, followed by the sterling share of 4.7%, down from 5.0% in Q3. In other words, there is simply no true rival to the dollar’s reserve status emerging anytime soon.
Reports suggest the U.S.is drafting a plan to impose 20% tariffs on most imports tomorrow. White House advisors stressed that several plans are still on the table ahead of the planned rollout tomorrow at 3 PM ET. However, such a move would harken back to the universal tariff plans that were discussing during the presidential campaign. The White House reportedly believes that these and other tariffs would raise more than $6 trln in revenue, which could be used to finance a tax rebate for most Americans. Using universal tariffs as a revenue raising tool has been panned by most economists, and rightly so. Today, the U.S. Treasury and Commerce departments will publish their trade review report, which could offer some hints about the scale and scope of tariffs to be announced tomorrow. Stay tuned.
ISM manufacturing PMI will be the data highlight. Headline is expected at 49.5 vs. 50.3 in February. Keep an eye on prices paid, which is expected at 64.6 vs. 62.4 in February. New orders and employment are expected to fall modestly to 48.4 and 47.2, respectively. The regional Fed manufacturing surveys suggest risk are skewed to the downside. Of note, the S&P Global manufacturing PMI dropped 2.9 points to a three-month low of 49.8 in March. ISM services will be reported Thursday and headline is expected at 53.0 vs. 53.5 in February. Chicago PMI was reported yesterday at 47.6 vs. 45.0 expected and 45.5 in February. This was the highest reading since November 2023. However, this series hasn't correlated with the national PMIs for several years now and so offers little insight into the ISM PMIs.
February JOLTS data will also be important. Openings are expected at 7.655 mln vs. 7.740 mln in January. Job openings have declined but the ratio of job openings to unemployed remains strong above 1. Moreover, there is no layoff spiral underway and the job openings rate is expected to remain steady at 4.6%, a level consistent with a low unemployment rate. Fed research showed that the unemployment rate tends to rise faster when the job openings rate falls under 4.5%. March Challenger jobs cuts and weekly claims will be reported Thursday.
The growth outlook is diverging. The New York Fed Nowcast model estimates Q1 growth at 2.9% SAAR and Q2 growth at 2.6% SAAR and will be updated Friday. Contrast this with the Atlanta Fed GDPNow model, which estimates Q1 at a whopping -2.8% SAAR and will be updated today after the data. When adjusted for trade in gold, it improves to -0.5% SAAR. 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 draws to a close this week but we won’t get official GDP data until April 30.
Fed officials continue to focus on the inflationary impact of the tariffs. Williams said “Definitely there’s upside risks depending a lot on these, on the tariffs and other policies that may take place.” He added that uncertainty about the Trump administration policies is likely affecting the behavior of some consumers and businesses. Barkin speaks today. Barkin provided one of the best quotes last week when he warned that “the feeling of uncertainty is undeniable…A dense fog has fallen. It’s not an everyday “forecasting is hard” type of fog. It’s a “zero visibility, pull over and turn on your hazards” type of fog.”
Canada also reports March PMIs this week. S&P Global manufacturing will be reported today, while its services and composite PMIs will be reported Thursday. All three 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
Eurozone reported soft March CPI data. Headline fell a tick as expected to 2.2% y/y and core fell a tick more than expected to 2.4% y/y vs. 2.6% in February. Furthermore, services inflation fell three ticks to 3.4% y/y and is the lowest since June 2022. The eurozone disinflationary process remains well on track. Markets are still pricing in about 75% odds of a 25 bp cut to 2.25% at the next meeting April 17, down from 85% at the start of this week. 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 than is currently priced in (roughly 50 bp of total easing over the next 12 months but with 50% odds of a third 25 bp cut). A story ran yesterday that several European Central Bank officials are still undecided about whether to cut rates again next month. This is actually nothing new, as Wunsch and Muller are both on record as saying an April pause was possible. President Lagarde and Chief Economist Lane speak later today.
Final March eurozone manufacturing PMIs were reported. Headline fell a tick to 48.6. Looking at the country breakdown, Germany was steady at 48.3 while France fell four ticks from the preliminary to 48.5. Italy and Spain reported for the first time and both came in weaker than expected and fell to 46.6 and 49.5, respectively. Final services and composite PMIs will be reported Thursday. Here too, Italy and Spain report for the first time and their services PMIs are expected to worsen modestly to 52.5 and 55.5, respectively.
The Riksbank announced a rebalancing of its foreign reserves. It will increase the USD share to 70% vs. 62% previously, decrease the EUR share to 17.5% vs. 22% previously, leave the GBP share steady at 5%, leave the AUD share steady at 5%, and decrease the NOK share to 2.5% vs. 3.0% previously. The bank noted that “In this way, the Riksbank achieves a good balance between contingency preparedness, risk and return.” Back in September 2023, the Riksbank announced it would hedge $8 bln and EUR2 bln to “maintain sound risk management and reduce currency risk.” This hedging will be maintained, and accounts for just under a quarter of its foreign reserves.
ASIA
Japan Q1 Tankan report was mixed. The large manufacturing index came in as expected at 12 vs. 14 in Q4, while the large manufacturing outlook came in at 12 vs. 9 expected and 13 in Q4. Elsewhere, the large non-manufacturing index came in at 35 vs. 33 expected and was steady from Q4, while the large non-manufacturing outlook came in a point lower than expected at 28 and was steady from Q4. Lastly, large all industry capex came in a tick lower than expected at 3.1% vs. 11.3% in Q4 and was the weakest since Q1 2021. Conditions for large companies had improved in recent quarters but appear to have peaked for manufacturing and likely to peak soon for non-manufacturing. The Tankan report also showed modest upward adjustments in inflation expectations by businesses. 1-year expectations came in at 2.5%, 3-year at 2.4%, and 5-year at 2.3%, all up one tick compared to the Q4 survey. With inflation expectations remaining relatively well anchored, the BOJ is unlikely to raise rates more than is priced in. The swaps market continues to see a terminal rate of 1.25% over the next three years, with the next 25 bp hike seen in September.
Reserve Bank of Australia kept rates steady at 4.10%, as expected. It signaled it’s in no hurry to resume easing. First, the RBA scrapped the sentence from the February statement that “the Board remains cautious on prospects for further policy easing.” Second, the RBA noted “the continued decline in underlying inflation is welcome, but there are nevertheless risks on both sides and the Board is cautious about the outlook.” Governor Bullock added during the press conference that the Board does not have “100% confidence” that inflation is moving sustainably towards the midpoint of the 2–3% target range. Bullock confirmed that the decision to hold was a consensus one and there was no explicit rate cut discussion. The market scaled back odds of a 25 bp cut at the next meeting May 20 to 70% from 80% prior to the rate announcement. Ahead of the May policy meeting, two labor market prints and the Q1 CPI data will help shape near-term RBA rate expectations. The next Statement on Monetary Policy will also be published at the May 20 meeting.
Caixin reported firm March manufacturing PMI. Headline came in at 51.2 vs. 50.6 expected and 50.8 in February. Caixin then reports its services and composite PMIs Thursday and is expected to pick up a tick to 51.5. At the start of this week, China reported firm official March PMIs. 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.
