• The tariff roller coaster took another twist; ADP reported a weak private sector jobs estimate; Fed Beige Book suggests little impact from Trump policies so far; February ISM services PMI was strong; January trade data will be reported
  
• The ECB is expected to cut rates 25 bp; U.K. February DMP inflation expectations picked up; Sweden February CPI data ran slightly hot; Turkey cut rates 250 bp to 42.50%, as expected
  
• Japan’s biggest trade union group is demanding larger wage hikes; Malaysia kept rates steady at 3.0%, as expected

The dollar remains under pressure ahead of the ECB decision. DXY is trading lower for the fourth straight day near 104.215. It is at the lowest level since early November and remains on track to test the November 5 low near 103.373. USD/JPY is trading near 149.45 after cautious BOJ comments (see below). The euro is trading higher near $1.08 ahead of the ECB decision due shortly (see below), while sterling is trading higher near $1.2880. Recent softness in the U.S. data is concerning and has weighed 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. Jobs data tomorrow will be key. The Fed Beige Book suggests little impact so far from Trump policies see below) and so we expect the Fed to deliver a neutral hold this month. Lastly, tariffs should help keep the dollar firm but so far this week, the reaction has been the opposite, due in large part to many twists and turns from the U.S. (see below). The dollar should eventually get some traction as the prospects of higher inflation from tariffs should keep the Fed on hold for now.

AMERICAS

The tariff roller coaster took another twist. After hitting Canada and Mexico with 25% tariffs on Tuesday (with a reduced 10% rate for Canadian energy), the Trump administration announced Wednesday that the 25% tariffs on autos and auto parts traded through the North American trade pact USMCA would be paused for one month. Prime Minister Justin Trudeau said Canada won’t lift counter-tariffs unless all US levies are lifted. Reports suggest one of the main reasons for the delay is so that automakers cane formulate plans to move more investment and production to the U.S. Reports also suggest President Trump is considering exempting certain agricultural products as well from the tariffs on Mexico and Canada. Stay tuned.

ADP reported a weak private sector jobs estimate. It came in at 77k vs. 140k expected and a revised 186k (was 183k) in January. Bloomberg consensus for NFP is 160k vs. 143k in January, while its whisper number stands at 135k. February Challenger job cuts and weekly jobless claims will be reported today. We remain constructive on the U.S. growth outlook but acknowledge that the consumer spending contraction in January is a red flag. We believe that the strength of the labor market will decide whether the poor data in January was just a blip or the start of a deeper downturn. Friday’s February non-farm payrolls data will be key.

The Fed Beige Book for the March 18-19 FOMC meeting suggests little impact from Trump policies so far. On overall economic activity: Overall economic activity rose slightly since mid-January. Unusual weather conditions in some regions over recent weeks weakened demand for leisure and hospitality services. Overall expectations for economic activity over the coming months were slightly optimistic. On labor markets: Employment nudged slightly higher on balance, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline. Contacts in multiple Districts said rising uncertainty over immigration and other matters was influencing current and future labor demand. Wages grew at a modest-to-moderate pace, which was slightly slower than the previous report, with several Districts noting that wage pressures were easing. On prices: Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period. Firms in multiple Districts noted difficulty passing input costs on to customers. However, contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.

We expect the Fed to deliver a neutral hold this month. While the Beige Book was fairly upbeat, the data point to potential stagflation risks and that calls for caution in either direction for Fed policy. Of note, the market is pricing in cuts in June, September, and December, which is not recession pricing but nevertheless reflects market concern with the economic outlook. Harker, Waller, and Bostic speak today.

February ISM services PMI was strong. Headline came in at 53.5 vs. 52.5 expected and 52.8 in January. Employment rose to 53.9 vs. 51.6 expected and 52.3 in January and was the highest since December 2021, while business activity remained strong at 54.4 vs. Jan 54.5 in January. Of note, prices paid rose to 62.6 vs. 60.4 expected and actual in January and confirms the jump in manufacturing prices paid to 62.4 vs. 54.9 in January. Both readings point to persistent price pressures.

January trade data will be reported. A deficit of -$128.7 bln is expected vs. -$98.4 bln in December. There are upside risks after the advance goods balance blew out to -$153.3 bln in January vs. -$122.0 bln in December, as U.S. importers accelerated purchases ahead of the planned tariffs. Trade imbalances are a key input in the Trump administration’s tariff decisions. Indeed, the Trump administration’s tariff announcements mainly target countries where the U.S. runs large goods trade deficits. The U.S. runs the biggest cumulative goods trade deficits with China and the European Union of -$285 bln and -$226 bln, respectively. The U.S. also runs significant cumulative goods trade deficits with Mexico and Canada of -$174 bln and -$73 bln, respectively.

The growth outlook remains cloudy. The Atlanta Fed's GDPNow model is tracking Q1 growth at -2.8% SAAR and will be updated today after the data. As we have noted before, the Q1 growth estimates so far are basically based on one or perhaps two months of data and so the early numbers can bounce around quite a bit as more inputs are reported. Elsewhere, the New York Fed's Nowcast model is doing better and has Q1 growth at 2.9% SAAR. It will be updated tomorrow and the model will also provide its first estimate for Q2 growth.

Canada highlight will be February Ivey PMI. S&P Global PMIs have come in very weak, with manufacturing falling to 47.8 vs. 51.6 in January, services falling to 46.6 vs. 49.0 in January, and the composite falling to 46.8 vs. 49.5 in January. This was the lowest composite reading since January 2024.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank is expected to cut rates 25 bp. The bank is also expected to remove reference that monetary policy remains restrictive because the policy rate is getting close to neutral rate territory. ECB staff now estimates the neutral rate between 1.75-2.25%. Scrapping the restrictive reference would signal limited scope to ease policy more than is currently priced in and would offer EUR some support. Furthermore, the prospects for looser fiscal policy in the Eurozone lessens the need for the ECB to do the heavy lifting in supporting growth. Market pricing has adjusted accordingly to imply less ECB easing over the next twelve months (75 bp vs. nearly 100 bp on Monday). The ECB will also publish updated macroeconomic projections.

U.K. February DMP inflation expectations picked up. 1-year expectations picked up a tick as expected to 3.1%, which was the highest in nearly a year, while 3-year expectations picked up two ticks to 2.9% and reversed the January drop. Both series remain above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path. The swaps market is pricing in 50 bp of total easing over the next 12 months.

Sweden February CPI data ran slightly hot. Headline came in two ticks higher than expected at 1.3% y/y vs. 0.9% in January, while the policy relevant CPIF came in two ticks higher than expected at 2.9% y/y vs. 2.2% in January. CPIF ex-energy came in three ticks higher than expected at 3.0% y/y vs. 2.7% in January. CPIF was the highest since January 2024 and moves further above the 2% target. Inflation is tracking above the Riksbank’s projections made in December and suggests the bar for additional easing is high. The Riksbank projects the policy rate bottoming at the current level of 2.25%, and markets have now adjusted to the bank’s forecast after pricing in a lower terminal policy rate of 2.00% ahead of the CPI data.

Turkey central bank cut rates 250 bp to 42.50%, as expected. This was the third straight cut of 250 bp. The bank noted that the “underlying trend of inflation decreased in February” and that “services inflation slowed down after the idiosyncratic increase in January.” Earlier this week, Turkey reported softer February CPI data. Headline came in at 39.05% y/y vs. 39.90% expected and 42.12% in January, while core came in at 40.21% y/y vs. 41.10% expected and 42.65% in January. Headline was the lowest since June 2023 but remains well above the 3-7% target range. The bank reiterated that policy would be determined on “a meeting-by meeting” basis with a focus on the inflation outlook. The swaps market is pricing in 1575 bp of total easing over the next 12 months that would take the policy rate to 26.75 vs. 30.5% seen at the start of this week, but this may be too optimistic if inflation overshoots the bank’s updated year-end forecast of 24% vs. 21% previously.

ASIA

Japan’s biggest trade union group Rengo is demanding larger wage hikes. Members are asking an average wage increase of 6.09% this year, up from last year’s 5.85%, seeking more than 6% for the first time in more than three decades. Faster wage growth is an upside risk to Japan’s inflation outlook and could force the Bank of Japan to normalize rates by more than is currently priced in. Th swaps market sees nearly 50 bp over the next 12 months. January cash earnings data will be reported next Monday and is expected to show some slowing, with nominal earnings expected at 3.0% y/y vs. 4.4% in December and real earnings expected at -1.6% y/y vs. 0.3% in December.

Bank Negara Malaysia kept rates steady at 3.0%, as expected. Its statement was identical to the one from the last meeting January 22 as the bank noted that “The monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.” The bank added that there are downside risks from a slowdown in Malaysia’s major trading partners, but Governor Abdul Rasheed Ghaffour said that the diversified economy and broad export base will help limit the impact from external shocks. Despite the bank’s upbeat outlook, the swaps market is still pricing in 25 bp of easing over the next 12 months.