• We are still in the early days of the trade wars; retaliation will continue; there are hints of some softening of the U.S. stance; ADP and February ISM services PMI will be the focus; Fed Beige Book for the March 18-19 FOMC meeting will be published
  
• Germany is turning on the fiscal taps; Switzerland reported February CPI data
  
• BOJ Deputy Governor Uchida spoke; Australia reported solid Q4 GDP data; RBNZ Governor Orr unexpectedly resigned; Caixin reported firm February services and composite PMIs; China reiterated its vague pledge to “vigorously” boost consumption

The dollar continues to weaken ahead of ADP and ISM reports. DXY is trading lower for the third straight day near 105 and is at the lowest level since mid-November. It is testing the 200-day moving average near 105 today and a break below sets up a test of 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 $1.0685 after reports of German fiscal stimulus (see below), while sterling is trading higher near $1.28200. 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. Data this week will be key. Lastly, tariffs should help keep the dollar firm but so far this week, the reaction has been the opposite. Perhaps this is a bit of “buy the rumor, sell the fact” price action, as the prospects of higher inflation from tariffs should keep the Fed on hold for now.

AMERICAS

We remain puzzled by dollar weakness. Tariffs are in place that will materially impact inflation, which in turn will keep the Fed on hold. However, the U.S. data have come in soft recently and so markets have ramped up their bets on Fed easing this year. In order for the dollar to stage a recovery, the data will have to improve and show that the recent softness was temporary. Today’s ISM services PMI will be important, but we believe a lot will depend on Friday’s jobs report. We acknowledge that fiscal developments out of Europe are euro-positive but continue to believe that markets are still underestimating the need for further monetary easing. We maintain our strong dollar call but the data will have to improve. If indeed, we are at the start of a potential slowdown or recession, then the dollar has likely peaked. Stay tuned.

We are still in the early days of the trade wars. For those keeping score at home, 25% tariffs on all steel and aluminum are scheduled to go into effect March 12. Then 25% tariffs on chips, pharmaceuticals, and autos will go into effect April 2. Reciprocal tariffs are likely to be announced on a rolling basis after April 2, which marks the end of trade policy review period. Tariffs on agricultural imports were also threatened this week but no further details have been reported.

Retaliation will continue. Mexico Presidente Sheinbaum said she will be announcing tariffs and other countermeasures this Sunday at noon. She said “Our goal isn’t to begin an economic confrontation, which unfortunately is the opposite of what we should be doing. It’s inconceivable not to think of the damage this will cause to US citizens and companies. No one wins with this decision.” We concur. Yet given the hardened US stance, Mexico really has no choice but to follow Canada's lead and retaliate.

There are hints of some softening of the U.S. stance. Commerce Secretary Lutnick said yesterday that “Both the Mexicans and the Canadians were on the phone with me all day today trying to show that they’ll do better, and the president’s listening, because you know he’s very, very fair and very reasonable. So I think he’s going to work something out with them - it’s not going to be a pause, none of that pause stuff, but I think he’s going to figure out: you do more and I’ll meet you in the middle some way and we’re going to probably announcing that tomorrow.” As we all know, policy can turn on a dime and so we would not put too much faith in this.

ADP reports its private sector jobs estimate. It is expected at 140k vs. 183k in January. This comes ahead of the February jobs report Friday. Bloomberg consensus for NFP is 160k vs. 143k in January, while its whisper number stands at 130k. For reference, payroll job gains averaged 237k per month over the past three months, with last month's gains likely held back by the Los Angeles wildfires and the harsh winter weather across much of the nation. Recent government layoffs are a downside risk to the labor market outlook going forward, but it’s worth noting that total federal jobs account for less than 2% of total non-farm employment.

February ISM services PMI will also be important. Headline is expected to fall three ticks to 52.5. The regional Fed ISM services prints point to downside risks, as does the S&P Global services PMI, which plunged to 49.7 in February vs. 52.9 in January and was the first contraction in the services sector in 25 months. Importantly, prices paid is expected to remain steady at 60.4, but there are upside risks after the spike in manufacturing prices paid. Employment is expected at 51.6 vs. 52.3 in January.

The Fed Beige Book for the March 18-19 FOMC meeting will be published. We expect the report to show growing concerns about the impact of planned tariffs as well as possible reports of softness in some regional labor markets due to the federal layoffs, which is likely to be amplified by the impact on contractors that rely on government work. There may also be some reports of softer consumption in some regions, as well as curtailed investment due to tariff uncertainty. All in all, more regional Fed officials are voicing concerns about the impact of Trump policies and that is likely to be reflected in the tone of this Beige Book.

Fed officials are finally acknowledging the impact of Trump policies. Williams said “Based on what we know today, given all the uncertainties around that, I do factor in some effects of tariffs now on inflation, on prices, because I think we will see some of those effects later this year.” He added that we also “have to factor in how does that affect economic activity - decisions by businesses to invest, consumers to spend?” And that’s where I think another big uncertainty is.” The Fed Funds futures market is pricing in 25 bp cuts at the June, September, and December FOMC meetings, followed by another 25 bp cut in 2026. While this is not recession pricing, the market clearly sees some risk that one materializes. Stay tuned.

Canada also reports February PMIs. Services and composite PMIs will be reported. S&P Global reported its manufacturing PMI Monday at 47.8 vs. 51.6 in December. Ivey PMI will be reported tomorrow.

EUROPE/MIDDLE EAST/AFRICA

Germany is turning on the fiscal taps. Incoming Chancellor Merz said his center-right CDU/CSU and the center-left Social Democrats (SPD) will next week jointly present a bill in parliament to set up a EUR500 bin fund (about 3.3% of eurozone GDP) spread over ten years for infrastructure spending. The future coalition partners also plan to amend the constitution to exempt defense and security outlays from limits on fiscal spending. It will prioritize investment in transportation, energy grids, and housing. This comes a day after reports suggesting the EU will activate a program that would allow member counties to spend an extra EUR650 bln on defense over the next four years without triggering any budgetary penalties. Reports also suggest the EU will propose EUR150 bln in loans to boost defense spending. The shift in the eurozone fiscal stance, prospects of a less hawkish ECB tomorrow, and broad dollar weakness have conspired to push the euro to its strongest level since mid-November. It is testing the 200-day moving average near $1.0720 today and a break above sets up a test of the November 5 high near $1.0935.

Switzerland reported February CPI data. Headline came in a tick higher than expected at 0.3% y/y vs. 0.4% in January while core came in two ticks higher than expected at 0.9% y/y and was steady from January. Headline was the lowest since April 2021 and moves further below the 2% target. The market is pricing in a 25 bp cut at the next meeting March 20 followed by an additional 25 bp cut over the next 12 months that would see the policy rate bottom at 0%. However, we remain doubtful that the SNB will deliver more cuts in the near-term and see additional upside for CHF. USD/CHF is trading at the lowest level since mid-December.

ASIA

Bank of Japan Deputy Governor Uchida spoke. Uchida largely stuck to the script as he signaled that the BOJ would continue to raise rates if the bank’s economic outlook is realized. Uchida added that it's unlikely the bank would raise rates at back-to-back meetings. Markets are pricing in the next 25 bp hike to 0.75% in September or October. Looking ahead, the swaps market is still pricing in over 50% odds that the policy rate will peak near 1.25%. However, such a gradual BOJ normalization cycle limits JPY upside.

Japan reported firm final February services and composite PMIs. Services rose six ticks from the preliminary to 53.7, which helped push the composite up four ticks from the preliminary to 52.0. This was the fourth straight rise in the composite PMI and the highest since September. This bodes well for Q1 growth and should give the BOJ confidence to continue tightening modestly.

Australia reported solid Q4 GDP data. Real GDP came in as expected at 0.6% q/q vs. 0.3% in Q3, while the y/y rate came in as expected at 1.3% vs. 0.8% in Q3. Both public and private expenditure contributed to growth, supported by an increase in exports of goods and services. The RBA projects growth to return to its trend rate of 2% over 2025 and remains cautious, which offers AUD support. Deputy Governor Andrew Hauser reiterated overnight that “the Board does not currently share the market’s confidence that a sequence of further cuts will be required.” The market is pricing in 75 bp of easing in the next 12 months, with the next 25 bp cut priced in for May as heightened trade tensions weighs on the global economic outlook.

Australia reported soft final February services and composite PMIs. Services fell six ticks from the preliminary to 50.8, which helped drag the composite down six ticks from the preliminary to 50.6. This was the first drop in the composite PMI since September and moves it closer to the key 50 boom/bust level.

Reserve Bank of New Zealand Governor Orr unexpectedly resigned. Orr still had three years left in his second five-year term but he did not give any reason for his sudden departure. Deputy Governor Hawkesby will become Acting Governor until March 31. Finance Minister Willis said that, on recommendation from the RBNZ Board, she will appoint a temporary governor starting April 1 for a period of up to six months. Orr’s sudden departure was a personal decision according to RBNZ Chair Neil Quigley and has no material policy implications. The RBNZ has penciled in another 75 bp of easing over the next 12 months that would see the policy rate bottom at 3.00%. This seems about right and is in line with swaps market pricing.

Caixin reported firm February services and composite PMIs. Services came in at 51.4 vs. 50.7 expected and 51.0 in January, which helped pull the composite up by four ticks to 51.5. This was the highest reading for the composite since November and confirms the firmer official PMI readings reported over the weekend.

China’s annual “Two Sessions” National People's Congress meeting began today. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives. To wit, officials set a growth target of “about 5%” for 2025, with a fiscal deficit target of “around 4%” of GDP. As part of the plan, China will sell CNY1.3 trln worth of special sovereign bonds vs. CNY1.0 trln in 2024. The extra CNY300 bln or 2025 will be used to finance a subsidy program for residents’ purchases of consumer goods, double the amount from 2024. China also announced CNY4.4 trln in local government special bond issuance for infrastructure and other public investments. This up from CNY4 trln in 2024. Quite simply, we do not think the solution to a huge debt overhang is to issue more debt.

China reiterated its vague pledge to “vigorously” boost consumption. It pledged to increase income and strengthen the social security system but did not offer specific details. Rebalancing the economy away from investment toward domestic consumption has been an explicit goal of China since the December 2004 Central Economic Work Conference. However, three major structural constraints have prevented any meaningful effort to boost the role consumption plays in the economy: low household income levels, high precautionary savings, and high levels of household debt.