The dollar remains under pressure as tariff uncertainty intensifies. DXY is trading lower for the second straight day near 100.800 after Trump acknowledged that most trade deals can’t be completed during the 90-day pause (see below). Instead, new tariffs will be set over the next 2-3 weeks. USD/JPY is trading lower near 145.55 despite soft GDP data. Elsewhere, the euro is trading higher near $1.12 and sterling is trading lower near $1.3295. We continue to view any dollar relief rallies with skepticism, which this week’s price action would seem to confirm. Easing trade tensions removed a significant headwind on the dollar over the short-term, but those tensions are likely to pick up over the next few weeks as the new (and higher) tariffs kick in. It’s anybody’s guess what the formula will be for these tariffs but rest assured that the average effective tariff rate will rise even further.
AMERICAS
President Trump admitted that most trade deals can’t be completed during the 90-day pause. Specifically, Trump said the US would set tariffs on its trading partners “over the next two to three weeks,” adding that “I think we’re going to be very fair. But it’s not possible to meet the number of people that want to see us.” Trump added that Treasury Secretary Bessent and Commerce Secretary Lutnick “will be sending letters out essentially telling people” what “they’ll be paying to do business in the United States.” We have long been skeptical that any trade deals of substance could be completed in 90 days, especially as studies suggest the average time to strike a deal was around 18 months.
It's anybody’s guess what formula will be used this time around. While it’s clear from the market reaction April 9 that the original reciprocal tariffs were too onerous, we also know that the 10% baseline remains the floor. The final (maybe) tariffs will be somewhere in between and our best guess is that they will be on the high side. However, as we learned April 9, nothing is final and could be adjusted due to market reactions. Either way, we expect the average effective tariff rate to rise even further from the estimated 17.8% now in place, the highest since 1934. Stay tuned.
Fed officials remain cautious. Bostic said uncertainty is unlikely to resolve itself quickly, as we don’t yet know the outcomes from the 90-day tariff pauses. He expects slower growth but not recession, adding that U.S.-China de-escalation changed his outlook “a little.” Lastly, Bostic sees one cut this year amidst the uncertainty. Elsewhere, Governor Barr warned the US economy could be headed toward a stagflation scenario as “The outlook has been clouded by trade policies that have led to an increase in uncertainty. Potential disruptions to supply chains and distribution networks are particularly acute for small businesses. If these disruptions were to occur, we'd likely see lower growth and higher inflation ahead.” The odds of a June cut have fallen below 10%, rising to around 40% in July and fully priced in for September. Looking ahead, the swaps market is pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in last week.
April PPI data ran cool. Headline came in at -0.5% m/m vs. 0.2% expected and a revised flat (was -0.4%) in March, while core came in at -0.4% m/m vs. 0.3% expected and a revised 0.4% (was -0.1%) in April. In y/y terms, headline came in a tick lower than expected at 2.4% y/y vs. a revised 3.4% (was 2.7%) in March, while core came3 in as expected at 3.1% y/y vs. a revised 4.0% (was 3.3%) in March. Of note, PPI ex-trade, transportation, and warehousing slowed a full percentage point to 3.3% y/y, the lowest since March 2023. This measure feeds into the PCE calculations and points to ongoing disinflation there. These were surprisingly soft readings and so there are still no real signs of tariff impact yet.
April retail sales data were soft overall. Headline came in a tick higher than expected at 0.1% m/m vs. a revised 1.7% (was 1.4%) in March, while ex-autos came in two ticks lower than expected at 0.1% m/m vs. a revised 0.8% (was 0.5%) in March. The so-called control group used for GDP calculations came in at -0.2% m/m vs. 0.3% expected and a revised 0.5% (was 0.4%) in March. In y/y terms, headline was steady at 5.2%, ex-autos fell two ticks to 4.2%, and the control group fell four ticks to 4.9% and decelerated for the second straight month.
We got our first glimpse of May activity. The Empire manufacturing survey came in at -9.2 vs. -8.0 expected and -8.1 in April. Elsewhere, the Philly Fed manufacturing survey came in at -4.0 vs. -11.0 expected and -26.4 in April. Both were surprisingly firm given the tariff impact. New York Fed services survey will be reported today and Philly Fed services survey will be reported next Tuesday.
The Q2 growth outlook is solid. The Atlanta Fed GDPNow model has Q2 growth at 2.5% SAAR now and is above the initial estimate of 2.4%. It will be updated today after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.4% SAAR and will also be updated today, while its initial Q3 estimate will come at the end of May.
University of Michigan reports preliminary May consumer sentiment. Headline is expected at 53.5 vs. 52.2 in April, with both current situation and expectations seen rising modestly to 59.9 and 48.6, respectively. The sentiment data no longer appear to be a reliable indicator of future spending behavior. Instead, attention will be on inflation expectations as last month’s data indicated they’re becoming unanchored. In April, 1-year expectations soared to 6.5%, the highest since November 1981, while 5 to 10-year expectations surged to 4.4%, the highest since June 1991. Both measures are expected to remain steady in May.
March TIC data will also be reported. Concerns about capital outflows from the U.S. picked up after the reciprocal tariff announcement but this March data is too early to reflect this. Net foreign purchases of long-term US securities increased by $142 bln in February. Private foreign investors continue to lead the charge with a net increase of $125.8 bln in US Treasury bonds and notes in February. Private foreign investors have more than offset foreign central banks’ net selling of longer-term US Treasury bonds and notes. However, policy uncertainty, doubts about the rule of law, and escalating fiscal burden threaten to make the US a less attractive place to invest. As Walter Bigelow Wriston (former CEO of Citicorp) said, “Capital goes where it’s welcome and stays where it’s well treated.”
EUROPE/MIDDLE EAST/AFRICA
European Central Bank officials are tilting less dovish. GC member Kazaks said “we are relatively close to the terminal rate already,” adding that a “couple” of cuts are still possible. Chief Economist Lane speaks today. A cut at the next meeting June 5 is nearly priced in, while the swaps market is pricing in about 50 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.
Bank of England Deputy Governor Lombardelli speaks today. She voted with the majority to cut rates 25 bp last week. The three-way vote split suggests back-to-back rate cuts are unlikely. Indeed, the BOE reiterated its guidance for “a gradual and careful approach” to further rate cuts. Odds of a 25 bp cut in June are around 10%, while the swaps market is pricing in around 50 bp of total easing over the next 12 months.
Romania central bank is expected to keep rates steady at 6.50%. At the last meeting April 7, the bank kept rates steady “in light of the particularly elevated uncertainty.” Moreover, inflation remains well above the 1.5-3.5% target range. That said, political turbulence suggests the risk of a policy rate hike cannot be ruled out. Romanian assets plunged on rising political risks, as far right party leader George Simion will now face-off against Nicuşor Dan, the pro-EU centrist mayor of Bucharest in a presidential runoff scheduled for Sunday. Simion is the favorite to win. Romania cannot afford to scare off foreign investors with political instability as the country has a huge current account deficit in excess of -8% of GDP.
ASIA
Japan reported soft Q1 GDP data. The economy contracted a tick more than expected at -0.2% q/q vs. 0.6% in Q4. Private demand contributed nothing to growth, same as Q4, fixed investment contributed 0.3 ppt vs. 0.1 in Q4, public demand contributed nothing to Q1, same as Q4, and net exports subtracted -0.8 ppt vs. +0.7 in Q4. Of note, inventories contributed 0.3 ppt vs. -0.3 in Q4. Recall that the BOJ downgraded its FY25 growth forecast to 0.5% from 1.1%, reflecting trade-related uncertainties. Indeed, the economy is likely to worsen in Q2, when the impact of the U.S. tariffs hit. In turn, this should keep the BOJ in cautious mode.
Bank of Japan officials remain cautious. Board member Nakamura argued the bank should pause monetary tightening due to tariff concerns. His comments are not surprising as he’s the most dovish BOJ member. Nakamura voted against the bank's decisions to raise rates in July 2024 and January 2025. His five-year term as a BOJ board member end in June. 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 Q2 inflation expectations picked up. 1-year expectations rose to 2.4% vs. 2.2% in Q1, while 2-year expectation rose to 2.3% vs. 2.2% in Q1. Despite the pickup, inflation expectations are still near the 2% mid-point across all time horizons, leaving plenty of room for the RBNZ to deliver more easing. At its April 8 meeting, the RBNZ cut rates 25 bp to 3.50% and noted it “has scope to lower the OCR further as appropriate.” The swaps market is still pricing in 75 bp of easing over the next six months that would see the policy rate bottom around 2.75%.
