• The trade war continues to intensify; Treasury Secretary Bessent had an opportunity to underscore a strong dollar policy but whiffed; PPI report was benign; University of Michigan preliminary March consumer sentiment will be the highlight; the labor market remains solid
  
• U.K. economy slowed in January
  
• Japan’s Rengo released initial results of the annual spring wage agreements; markets are bracing for more stimulus measures from China

The dollar remains firm ahead of the weekend. DXY is trading flat near 103.857 after support near the November 5 low of 103.373 held this week. The yen is underperforming after a lower than expected increase in spring wage talks (see below), with USD/JPY trading higher near 148.65. The euro is trading higher near $1.09 despite Trump threats of retaliatory measures on the EU (see below), while sterling is trading lower near $1.2945 after weak January economic data (see below). Recent softness in the U.S. data continues to weigh on the greenback. We are not ready to push the panic button yet but if the data continue to soften, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will come into question. The dollar is finally getting some traction this week due to a combination of risk off impulses, tariff threats, and U.S. data that is likely to keep the Fed on hold for now.

AMERICAS

The trade war continues to intensify. Yesterday, President Trump threatened retaliation on the European Union. Specifically referencing the EU’s 50% tariff on American whisky, Trump warned that “If this Tariff is not removed immediately, the U.S. will shortly place a 200% Tariff” on all alcoholic products from the EU. Later, Trump stressed that he is “not going to bend at all” on the Canadian metals tariffs or the April 2 reciprocal tariffs.

Treasury Secretary Bessent had an opportunity to underscore a strong dollar policy but whiffed. When asked about the dollar, Bessent noted that “The US dollar priced in a lot after President Trump’s victory and the Republican sweep” of Congress. He added that “It’s natural that after this big surge in the dollar, that other currencies could do well.” Based on prior writings and comments, we feel that when all is said and done, the Trump administration wants a weaker dollar. Unfortunately, that brings a host of potential problems that include higher US government borrowing costs and higher inflation. Officials need to be really careful on their dollar messaging, as it's impossible to get the weak dollar genie back in the bottle once it’s out.

The PPI report was benign. Headline PPI came in at 3.2% y/y vs. 3.3% expected and a revised 3.7% (was 3.5%) in January, while core PPI came in at 3.4% y/y vs. a revised 3.8% (was 3.6%) in January. Like the CPI data a day earlier, both headline and core were a tick lower than expected. PPI ex-trade, transportation, and warehousing is an input for PCE and fell a tick to 4.0% y/y. This is the lowest since November 2023. Of note, the Cleveland Fed’s Inflation Nowcast estimates February headline and core PCE y/y at 2.4% and 2.6% vs. January readings of 2.5% and 2.6%, respectively.

Fed policymakers should be relieved that the disinflationary trend has resumed. This is very important as it will give the Fed more leeway to cut rates if the economy really does slow significantly in the coming months. For now, we know the Fed is on hold until the impact of Trump policies becomes clearer. This is the likely message that the Fed will deliver at next week’s FOMC meeting in order to maintain maximum flexibility in case the data go south quickly. Cuts are still priced in for June, September, and December.

Growth in household net worth slowed sharply in Q4. Net worth increased only $164 bln in Q4 vs. a revised $4.823 bln (was $4.766 trln). This was the smallest gain since Q3 2023, when net worth fell -$3.449 bln. Equity holdings rose $264 bln, but this was offset by a decline in the value of real estate holdings. Strong household balance sheets have been a key factor underpinning solid consumption growth, but this Q4 data argue for some caution going forward.

University of Michigan preliminary March consumer sentiment will be the highlight. Headline is expected at 63.0 vs. 64.7 in February, driven by drops in both current conditions and expectations to 64.4 and 63.0, respectively. Attention will be on inflation expectations, as last month’s data indicated they are becoming somewhat unanchored. In February, one-year inflation expectations unexpectedly soared 1 ppt to 4.3%, the highest level since November 2023, while expectations 5 to 10 years out rose 0.3 ppt to 3.5%, matching the April 1995 high. Both are expected to ease a tick in March but we see upside risks.

The labor market remains solid. Initial claims came in at 220k vs. 225k expected and a revised 222k (was 221k) last week. The 4-week moving average rose slightly to 226k. Of note, next week's initial claims data will be for the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for March NFP but its whisper number stands at 40k. Yes, 40k. Continuing claims are reported with a one-week lag and came in at 1.870 mln vs. 1.888 mln expected and 1.897 mln last week.

The growth outlook remains cloudy. The New York Fed's Nowcast model is tracking Q1 growth at 2.67% SAAR vs. 2.94% previously and Q2 growth at 2.58% SAAR vs. 2.85% previously. Both readings will be updated today. This compares favorably to the Atlanta Fed's GDPNow model, which has Q1 at -2.4% SAAR and will be updated Monday. When adjusted for the unusual surge in nonmonetary gold imports, however, the model would be tracking growth at 0.4% SAAR. Yes, gold imports. Note that there is often a lot of volatility in the Atlanta Fed model estimates during the early months.

EUROPE/MIDDLE EAST/AFRICA

The U.K. economy slowed in January. GDP came in at -0.1% m/m vs. 0.1% expected and 0.4% in December, while the y/y rate slowed to 1.0% vs. 1.5% in December. Elsewhere, IP came in at -0.9% m/m vs. -0.1% expected and 0.5% in December, services index came in as expected at 0.1% m/m vs. 0.4% in December, and construction came in as expected at -0.2% m/m vs. -0.2% in December. Barring a strong recovery in February and March, Q1 GDP growth is on track to undershoot the Bank of England’s projection of 0.4% q/q. Still, the BOE is expected to pause at its March 20 meeting, in part because services inflation remains high at 5.0% y/y. The swaps market is pricing in 50 bp of easing over the next 12 months, with rising odds of an additional 25 bp cut. Bottom line: the UK’s near-term stagflation backdrop can continue to weigh on GBP against EUR.

ASIA

Japan’s largest trade union confederation Rengo released initial results of the annual spring wage agreements. It has secured a 5.46% average pay gain. That’s the highest level since 1991 and exceeded last year’s initial reading of 5.28%. Still, the pay hike was more modest than anticipated, as members were asking an average wage increase of 6.09% this year. The numbers will also be revised several times until the final tally in the summer, and typically come in lower than the initial reading. As such, the BOJ is unlikely to tighten the policy by more than is currently priced which is a headwind for JPY. The swaps market continues to imply less than 50 bp of tightening over the next twelve months.

Markets are bracing for more stimulus measures from China. Officials from the Finance Ministry, Commerce Ministry, the PBOC, and other government bodies will hold a press conference Monday to discuss measures to boost consumption. We’ve seen this time and time again during this cycle, with markets always getting too excited about what turn out to be very modest measures. Stay tuned.