• The global divergence theme has reasserted itself; preliminary March S&P Global PMIs were strong; CFNAI firmed in February; Fed officials remain cautious; tariffs are back in the news; Brazil central bank publishes its minutes
  
• German March IFO business climate survey was firm; ECB officials remain split; Hungary is expected to keep rates steady at 6.5%
  
• BOJ released the minutes of the January 23-24 meeting; Australian Treasurer Chalmers delivered the pre-election budget

The dollar is trading softer as markets await fresh drivers. DXY is trading lower for the first time since last Tuesday near 104.162. USD/JPY is trading lower near 150.20 after earlier testing the 151 level on dovish BOJ minutes (see below). The euro is trading higher near $1.0815 after a firm German IFO survey (see below) while sterling is trading higher in sympathy near $1.2950. Signs of life in the U.S. economy argues for a rethink of the pessimism (see below), and we fell vindicated in not pushing the panic button earlier this year. If the data continue to improve, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will come back into vogue. Global March PMI readings suggest that U.S. exceptionalism is back in play (see below).

AMERICAS

The global divergence theme has reasserted itself. March PMI readings saw the U.S. composite improve sharply (see below), while the eurozone, Australia, and the U.K. improved modestly. Of note, Japan’s composite fell below 50 for the first time since October and is at a new cycle low. China reports next week. For now, it appears that the U.S. is back as the world’s growth leader and that should help the dollar get some more traction.

Preliminary March S&P Global PMIs were strong. Manufacturing came in at 49.8 vs. 51.7 expected and 52.7 in February, while services came in at 54.3 vs. 51.0 expected and actual in February. This was the highest services reading since December and helped push the composite up to 53.5 vs. 50.9 expected and vs. 51.6 in January, also the highest since December. For those looking to confirm that U.S. economic outperformance is over, this was a big wake up call. That said, S&P Global noted that "some of the March upturn in services was reportedly due to business picking up after adverse weather conditions had dampened activity across many states in January and February, which could prove a temporary bounce." Markets put more weight on the ISM PMIs, which will be reported next week.

Chicago Fed National Activity Index firmed in February. Headline came in at 0.18 vs. -0.17 expected and a revised -0.08 (was -0.03) in January. As a result, the three-month moving average rose to 0.15 vs. a revised 0.07 (was 0.03) in January. This is the highest since April 2022 and moves further above the -0.7 threshold that typically signals recession. There are still no obvious signs of recession in the data and yet that's all that markets are focusing on. If anything, the CFNAI suggests the economy is picking up at the start of the year. This is consistent with the New York Fed Nowcast model’s estimate of Q1 growth at 2.7% SAAR vs. 2.3% in Q4. Elsewhere, the Atlanta Fed GDPNow model estimates Q1 growth at -1.8% SAAR but we know this reading is distorted by gold imports. It will be updated tomorrow and this update will include the growth estimate adjusted for foreign trade in gold.

The FX market was caught positioned the wrong way for strong U.S. data yesterday. According to the latest CFTC data for non-commercials through last Tuesday, net JPY longs were around 123k and near the highest on record going back to 1992 (the previous week was the high at nearly 134k). Elsewhere, net EUR longs were the highest since September and net GBP longs were the highest since November. It's going to take time still to shift sentiment back in favor of the dollar but this is a good start.

Fed officials remain cautious. With regards to the March Dot Plots, Bostic said "I was at two. I moved to one." He added that “I moved to one mainly because I think we’re going to see inflation be very bumpy and not move dramatically and in a clear way to the 2% target. Because that’s being pushed back, I think the appropriate path for policy is also going to have to be pushed back in getting us to that neutral level.” Specifically, Bostic said that inflation probably won’t get back to target until early 2027. Bostic certainly sounds more cautious than Powell did. When all is said and done, however, market pricing has remained fairly steady, with two to three cuts still priced in this year. Kugler and Williams speak today.

Tariffs are back in the news. President Trump said “I may give a lot of countries breaks. They’ve charged us so much that I’m embarrassed to charge them what they’ve charged us, but it’ll be substantial, and you’ll be hearing about that on April 2.” Trump also said he would proceed with tariffs on lumber and semiconductors “down the road” but gave no further details. He also repeated his threats to put tariffs on pharmaceuticals in “the very near future.” Stay tuned.

Brazil central bank publishes its minutes. 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 bank then publishes its quarterly inflation report Thursday. Mid-March IPCA inflation will also be reported Thursday. 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 swaps market is pricing in 125 bp of further tightening over the next six months that would see the policy rate peak near 15.5%.

EUROPE/MIDDLE EAST/AFRICA

German March IFO business climate survey was firm. Headline came in as expected at a nine-month high of 86.7 vs. a revised 85.3 (was 85.2) in February. Current assessment came in two ticks higher than expected at 85.7 vs. 85.0 in February, while expectations came in four ticks higher than expected to a ten-month high of 87.7 vs. a revised 85.6 (was 85.4) in February. IFO President Fuest noted that “This spending plan is a big change,” but warned that “it will have to be complemented with other types of reform - if not, it will maybe primarily affect inflation.” He added that “There is a basic concern about US trade policy, of course, but we haven’t seen major changes in these concerns. That may change when the Trump administration actually publishes its plans announced for next week. But currently we don’t see much in the survey.”

ECB officials remain split about April. Kazimir said “The April meeting will be very interesting. You know the market’s expectations, but I have to say that I’m open to discussing either further interest rate cuts or holding steady.” Muller said “I really wouldn’t rule out the possibility that perhaps it would be reasonable at least to stop for a moment and evaluate based on new data what the impact of all these factors could be before we make the next rate decisions.” On the other side of the aisle, Cipollone said “At the time of our March meeting, markets were pricing in a reduction in interest rates over the coming months, including going below 2%. Since then, not only has this narrative been confirmed, but key issues have arisen that have strengthened the arguments in favor of continuing to lower rates.” Escriva said “There are some upside risks, like fiscal policy, as long as it might last, and others. But downside risks are more obvious than the upside risks.” The market currently sees 65% odds of an April cut, with a second cut fully priced in for Q4. Holzmann, Vujcic, and Nagel speak today.

National Bank of Hungary is expected to keep rates steady at 6.5%. At the last meeting February 25, the bank kept rates steady at 6.5%. Deputy Governor Virag said then that “A cautious, patient, stability-oriented policy continues to be warranted,” adding that the bank will raise the top end of its 2025 inflation forecast from 4.1% in its updated macro forecasts that come at this week’s meeting. The swaps market is pricing in steady rates over the next 12 months.

ASIA

Bank of Japan released the minutes of the January 23-24 meeting. At that meeting, the bank delivered the expected 25 bp hike. The key takeaway from the minutes is that the bar for an aggressive tightening cycle is high. One member pointed out that “it would be necessary for the Bank to carefully adjust its monetary policy while examining the impact of the policy interest rate hike on economic activity and prices at the time of each rate hike.” One member felt that the policy rate should be around 1% in H2 of FY25 and that the BOJ should raise rates toward that level if economic activity and prices develop in line with outlook. Lastly, one member felt that the bank should be extremely careful about suggesting the pace of rate hikes and the terminal rate. The summary of opinions from the March 18-19 meeting will be released Friday. At last week’s meeting, the bank delivered the expected hold and still sounded cautious. All in all, the BOJ guidance reinforces market pricing for a terminal rate around 1.25% over the next two years, with the next 25 bp hike priced in for September.

Australian Treasurer Chalmers delivered the pre-election budget. The government unveiled several pre-election spending initiatives including new tax cuts from 1 July 2026 and 1 July 2027. Nevertheless, the underlying cash balance improved from the Mid-Year Economic and Fiscal Outlook (MYEFO). For 2025/26, the underlying cash deficit is estimated -AUD42.1 bln (-1.5% of GDP) vs. -AUD46.9 bln (-1.6% of GDP) forecast in the MYEFO. For 2026/27, the deficit is estimated -AUD35.7 bln (-1.2% of GDP) vs. -AUD38.4 bln (-1.3% of GDP) forecast in the MYEFO. Despite the pre-election goodies, this budget will not complicate the RBA’s job at curbing inflation pressures in the near-term. Australia must hold an election by May 17 and the Labor government is almost neck-and-neck with the center-right opposition coalition in polls.