The dollar remains under pressure ahead of the holiday weekend. DXY is trading lower near 99.354 and clean break below 99.470 sets up a test of the April 21 low near 97.921. USD/JPY is trading lower near 143.35 as April national CPI data ran hot. Elsewhere, the euro is trading higher near $1.1350 as ECB officials signal they are fine with currency strength (see below), while sterling is trading at a new cycle high near $1.3500 after strong retail sales data (see below). We continue to view any dollar relief rallies with skepticism. Easing trade tensions have removed a significant headwind on the dollar over the short-term, but those tensions are likely to pick up over the next couple of weeks as new (and higher) tariffs are announced. Yesterday’s dollar bounce from firm S&P Global PMI readings quickly ran out of steam. Even a resolutely hawkish Fed has done little to help the greenback as stagflation fears intensify.
AMERICAS
There is a lonesome dove on the FOMC. Governor Waller said that “If we can get the tariffs down closer to 10% and then that’s all sealed, done and delivered somewhere by July, then we’re in good shape for the second half of the year,” adding that “Then we’re in a good position at the Fed to kind of move with rate cuts through the second half of the year.” This is a much more optimistic view than most Fed officials. We believe tariffs are going up, not down, and also expect the impact on inflation to be more persistent. Indeed, Waller admitted that if the Trump administration announces higher tariff rates, this would “have much bigger impacts on inflation and put more of a handcuff on us to do anything with short-term rates.” Goolsbee, Musalem, Schmid, and Cook speak today. The odds of a June cut have fallen below 5%, below 30% in July, and are less than 80% in September. Looking ahead, the swaps market is still pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.
Fed officials spoke about ample reserves. Manager of the System Open Market Account at the New York Fed Perli warned that as the Fed’s balance sheet shrinks, upward pressure on money market rates will likely increase. He added that “represents a normalization of liquidity conditions and is not a cause for concern. However, it does imply that, in the future the SRF (Standing Repo Facility) is likely to be more important for rate control than it has been in the recent past.” Elsewhere, New York Fed President Williams said “absent a lending facility, the optimal supply of reserves under uncertainty is greater than it would be absent uncertainty.” He added that “Demand for central bank reserves is inherently nonlinear and subject to uncertainty.”
The Fed is clearly watching bank reserves for signs of stress. Recall that at the March 18-19 FOMC meeting, the Fed announced it was slowing the unwind in Treasury holdings from April 1. This was a technical adjustment to ensure liquidity remains abundant and had no monetary policy implications. The Fed will allow up to $5 bln (down from $25 bln) in USTs and $35 bln (unchanged) in MBS to mature each month without reinvesting the returned principal. Only Fed Governor Waller voted against this action and preferred to continue the current pace of decline.
The Supreme Court quashed any notions that it would uphold Trump firing Powell. While the court extended its temporary order by Chief Justice Roberts to allow Trump’s ouster of agency heads, it said that decision wouldn’t apply to the Fed. The court wrote that the Fed is a “uniquely structured, quasi-private entity.” As a result, it disagreed with the argument made by attorneys for the two ousted agency heads that “arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee.” While Trump has said he has no intention of firing Powell, this ruling suggests such a move would not hold up in the courts. Let’s hope we never have to find out.
S&P Global preliminary May PMIs were firm. Manufacturing came in at 52.3 vs. 49.9 expected and 50.2 in April, services came in at 52.3 vs. 51.0 expected and 50.8 in April, and the composite came in at 52.1 vs. 50.3 expected and 50.6 in April. Despite the rise, the composite did not fully recoup last month’s drop from 53.5 in March. ISM PMIs will be reported the first week of June.
Chicago Fed April National Activity Index is worth discussing. Headline came in as expected at -0.25 vs. a revised 0.03 (was -0.03 in March). As a result, the 3-month moving average was steady at 0.05 and remains well above the -0.7 threshold that typically signals recession.
The Q2 growth outlook is solid. The Atlanta Fed GDPNow model now has Q2 growth at 2.4% SAAR and is right back at its initial estimate. It will be updated next Tuesday after the data. Elsewhere, the New York Fed Nowcast model now has Q2 at 2.3% SAAR and will be updated today, while its initial Q3 estimate will come at the end of May.
Weekly jobless claims are also worth discussing. That’s because initial claims were for the BLS survey week containing the 12th of the month and came in at 227k vs. 230k expected and 229k the previous week. Bloomberg consensus for May NFP stands at 125k vs. 177k in April, while its whisper number stands at 148k. Continuing claims are reported with a 1-week lag and came in at 1.903 mln vs. 1.882 mln expected and a revised 1.867 mln (was 1.881 mln) the previous week.
Canada highlight will be March retail sales data. Statistics Canada advance estimate indicates retail sales increased 0.7% m/m in March vs. -0.4% in February. The pick-up will likely reflect a surge in motor vehicle sales in anticipation of higher import duties. Indeed, sales ex-auto are expected at -0.1% m/m vs. 0.5% in February.
Brazil announced but then reversed some emergency measures to address fiscal concerns. The government initially froze BRL31 bln in spending and raised the tax on financial transactions (IOF), including FX and remittances, that was meant to bring in an additional BRL20 bln. BRL weakened sharply late yesterday on the notion that a tax on international transactions would lead to lower capital inflows. As a result, the government walked it back and said that the IOF on tax transfers to offshore funds would be kept at zero after “dialogue and technical evaluation.” However, the higher IOF on remittances appears to remain in place. Given the back and forth, BRL may still weaken today due to the lack of policy clarity. Of note, the government is aiming for a primary balance this year, +/- 0.25 ppt of GDP.
EUROPE/MIDDLE EAST/AFRICA
The ECB Account of the April 16-17 policy meeting paves the way for further EUR gains. ECB officials generally welcomed the recent appreciation in the euro. According to the account, “a possible structural increase in international demand for the euro, while entailing downside risks to inflation, was also a symptom of a largely positive development, namely a shift into European assets. A portfolio shift could lower long-term interest rates in the euro area and lead to cheaper financing for planned investment projects. Finally, the appreciation of the euro would further reduce the price of energy imports in euro terms, which could counterbalance some of the negative effects of the tariffs and the exchange rate on energy-intensive exporters.” President Lagarde last weekend showed no concerns about the strong euro but this account seems to welcome it.
ECB Q1 negotiated wages indicator ran cool. Wage growth eased further to 2.4% y/y vs. 4.1% in Q4 and the multi-decade high of 5.53% in Q3. This was in line with the ECB’s forward-looking wage tracker, where unsmoothed one-off payments indicated an average negotiated wage growth of 2.5% y/y in Q1 and 2.8% y/y over 2025. Bottom line: the Eurozone disinflation process remains well on track and the ECB has room to deliver the 50 bp of easing that’s currently priced in.
The eurozone continues to add countries. Reports suggest Bulgaria is poised to win positive assessments for euro adoption by both the European Commission and the ECB, when both release their convergence reports. If Bulgaria is given the green light, it would open up a path for entering the eurozone in early 2026. The last country to adopt the euro was Croatia in 2023. Despite periodic hand-wringing about the sustainability of the eurozone, it continues to add countries without losing any.
U.K. reported strong April retail sales data. Headline came in at 1.2% m/m vs. 0.3% expected and a revised 0.1% (was 0.4% in March), while ex-auto fuel came in at 1.3% m/m vs. 0.1% expected and a revised 0.2% (was 0.5%) in March. Sales rose across most sectors, with volumes only falling in clothing and other non-food stores. The Bank of England expects modest consumption growth of 0.2% q/q in Q2 supported by positive real wage growth. But higher household savings means spending activity will likely remain subdued. Aggregate household saving ratio rose to 11.6% in 2024 Q4, the highest level since the pandemic. Aggregate household savings ratio rose to 11.6% in 2024 Q4, the highest level since the pandemic. Odds of a 25 bp cut in June are basically nil, with the next cut not fully priced in until November. However, the swaps market is still pricing in around 50 bp of total easing over the next 12 months.
ASIA
Japan April national CPI data ran hot. Headline came in a tick higher than expected at 3.6% y/y and was steady from March, core came in a tick higher than expected at 3.5% y/y vs. 3.2% in March, and core ex-energy came in as expected at 3.0% y/y vs. 2.9% in March. Core was the highest since January 2023 and would move further above the 2% target. May Tokyo CPI data will be reported next Friday, with core expected to pick up a tick to 3.5% y/y. The Bank of Japan cut its core inflation forecast for FY25 to 2.2% in May vs. 2.4% in January and cut its FY26 forecast to 1.7% in May vs. 2.0% in January. These forecasts seem too low in light of the recent acceleration, but perhaps the expected slowdown in growth will temper inflation in the coming months. The BOJ is still seen on hold through 2025. Looking ahead, the swaps market is pricing in 25 bp of tightening over the next 12 months.
New Zealand reported firm Q1 real retail sales data. Retail sales ex-inflation rose 0.8% q/q vs. flat expected and a revised 1.0% (was 0.9%) in Q4. Motor vehicle retailing, and pharmaceutical and other store-based retailing saw the largest increases in Q1. Regardless, the RBNZ is widely expected to cut the Official Cash Rate (OCR) by 25 bp to 3.25% next week. At its April 8 meeting, the RBNZ cut rates by 25 bp to 3.50% and noted it “has scope to lower the OCR further as appropriate.”
