Dollar weakness is intensifying. DXY is trading lower for the fourth straight day just below 100 even as risk sentiment improves. The yen continues to outperform, with USD/JPY trading lower near 143 after trading earlier near 142.05. Elsewhere, both euro and sterling are trading higher near $1.1330 and $1.3065, respectively. Despite the bounce in risk sentiment, we expect the growth-sensitive majors and EM FX to remain under pressure as risks to global growth remain high regardless of the tariff pause. We also believe that this week’s post-pause dollar weakness is due in large part to a growing loss of confidence in U.S. policymakers (see below) as well as the negative impact of policy uncertainty on the U.S. economy. As such, we view any dollar recoveries as quite fragile, no matter how the U.S. data come in. Given the ongoing unpredictability of Trump administration policy, we continue to downplay any notions of a Fed response in the near term, which official comments would seem to support (see below).
AMERICAS
Dollar weakness is intensifying. Part of it is due to softer U.S. data recently, such as March CPI (see below) and the ISM PMIs. However, we continue to believe that a big part of the story is a growing loss of confidence in U.S. policymakers after the botched tariff rollout and subsequent U-turn. Markets value predictability and transparency in policymaking and we simply aren’t getting that from the U.S. There continue to be rumblings that Fed Chair Powell will be fired, especially after the Supreme Court order this week temporarily allowing President Trump to fire the heads of two independent agencies. Chief Justice Roberts said his order stands until either he or the full court issues a full decision. If Powell were to be fired, U.S. credibility would likely be shredded beyond repair.
March CPI data was soft. Headline came in a tick lower than expected at 2.4% y/y vs. 2.8% in February, while core came in two ticks lower than expected at 2.8% y/y vs. 3.1% in February. The drop in headline was due largely to energy and gas, while the drop in core was due largely to transportation and airfares. Super core CPI (core services less housing) fell to 2.9% y/y vs. 3.8% in February and was the lowest since March 2021. Looking ahead to April, the Cleveland Fed’s model now estimates headline and core at 2.4% and 2.8%, respectively.
We stress that the CPI data have yet to reflect the impact of the tariffs. Richmond Fed President Barkin recently spoke about the tariff impact on inflation and noted that "For the most part, there is enough inventory that we're talking about June prices more than we're talking about April prices,” adding that firms typically have 30-60 days of pre-tariff inventory to work through. Elsewhere, Boston Fed President Collins pointed out that an effective tariff rate somewhat above 10% would raise the core PCE price level by a cumulative 0.7 to 1.2 percentage points, with most of the effect likely occurring this year. This would result in core PCE inflation possibly running well above 3% this year. Lastly, Chicago Fed President Goolsbee noted that “a tariff is like a negative supply shock. That’s a stagflationary shock, which is to say it makes both sides of the Fed’s dual mandate worse at the same time.”
PPI will be reported today. Headline PPI is expected at 3.3% y/y vs. 3.2% in February while core PPI is expected at 3.6% y/y vs. 3.4% in February. Watch out for PPI ex-trade, transportation, and warehousing as it feeds into the PCE. In February, this measure fell a tick to a 15-month low of 4.0% y/y.
Fed officials are maintaining a wait and see approach. Logan said “To sustainably achieve both of our dual-mandate goals, it will be important to keep any tariff-related price increases from fostering more persistent inflation. For now, I believe the stance of monetary policy is well positioned.” Schmid said he is skeptical that tariff-related inflation is transitory, adding that “There is a growing possibility that in setting policy, the Fed will have to balance inflation risks against growth and employment concerns. When contemplating this balance, I intend to keep my eye squarely focused on the outlook for inflation.” Goolsbee said that because of uncertainty about the impact of volatile tariff policies, the Fed should wait before changing policy. Kashkari, Collins, Musalem, and Williams speak today.
University of Michigan reports preliminary April consumer sentiment. Headline is expected at 53.5 vs. 57.0 in March, with current conditions expected to drop to 60.8 and expectations expected to drop to 50.7. Attention will be on inflation expectations as last month’s readings indicated they’re becoming unanchored. 1-year inflation expectations are expected to increase two ticks to 5.2%, while 5 to 10-year expectations is expected to increase two ticks to 4.3%.
The growth outlook is getting murkier. The New York Fed Nowcast model now estimates Q1 growth at 2.6% SAAR and Q2 growth at 2.4% SAAR and will be updated today. This still greatly contrasts this with the Atlanta Fed GDPNow model, which estimates Q1 at -2.4% SAAR and will be updated next Wednesday. Q1 has drawn to a close but we won’t get official GDP data until April 30.
The US Congress moved a step closer to advance President Trump’s tax cuts and border priorities. The House adopted the Senate’s amended version of the budget resolution, which allows $5.3 trln in deficit-financed tax cuts. However, there is still a long way to go in the budget reconciliation process due to the wide gap in the minimum spending cuts proposals. The Senate version of the bill calls for a minimum of $4 bln in spending cuts while the House demands $1.5 trln in cuts. One can track the budget progress here. Overall, it's too soon to tell if the tailwind to US consumer spending from the expected tax cuts will offset the drag from tariff-related uncertainties. However, the projected growing supply of US debt is a recipe for higher Treasury yields if the pattern in foreign demand changes.
Brazil reports March IPCA inflation. Headline is expected at 5.45% y/y vs. 5.06% in February. if so, it would be the highest since February 2023 and would move further above the 1.5-4.5% target range. At the last meeting March 19, the central bank 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 swaps market is pricing in 75 bp of total tightening over the next six months.
EUROPE/MIDDLE EAST/AFRICA
ECB President Lagarde spoke. She stressed “The European Central Bank is monitoring, and is always ready to use the instruments that it has available and has come up in the past with the adequate instruments and tools that were necessary in order to procure price stability and of course financial stability because one doesn’t go without the other.” ECB easing expectations have picked up. The remarks come ahead of next week’s ECB meeting, when it is widely expected to deliver a 25 bp cut to 2.25%to help preempt the drag to growth from US tariffs. Looking ahead, the swaps market is now pricing in 75 bp of total easing over the next 12 months, with low but rising odds of another 25 bp cut after that. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates below the neutral policy settings. ECB staff estimate the neutral rate between 1.75-2.75%.
U.K. growth jumped in February. GDP came in at 0.5% m/m vs. 0.1% expected and a revised flat (was-0.1%) in January, IP came in at 1.5% m/m vs. 0.1% expected and a revised -0.5% (was -0.9%) in January, services came in at 0.3% m/m vs. 0.1% expected and actual in January, and construction came in at 0.4% m/m vs. 0.1% expected and a revised -0.3% (was -0.2%) in January. The bump was likely due to U.K. manufacturers boosting output ahead of the tariffs. Real GDP growth is tracking above the Bank of England’s Q1 projection of 0.1% q/q, but the trade war has worsened the overall growth outlook.
BOE officials continue to focus on the potential impact of tariffs. MPC member Breeden said “Seeing what the outlook for the exchange rate is likely to be strikes me as really important. This too is uncertain and will depend heavily on the decisions of other countries to impose counter tariffs, the evolution of the global risk sentiment and development in financial markets more broadly.” The BOE is expected to cut rates 25 bp to 4.25% at its next meeting May 8. Over the next 12 months, the swaps market is pricing in 100 bp of total easing that would see the policy rate bottom near 3.50%.
U.K. 10-year gilt yields fell after the BOE rescheduled its planned sale. The BOE announced it will no longer sell GBP600 mln of long maturity bonds held in the Asset Purchase Facility (APF) “in light of recent market volatility” and instead will auction GBP750 mln of short maturity bonds on April 14. The BOE intends to reschedule the long maturity auction to Q3. The move comes after the Fed recently slowed the pace of its QT.
ASIA
The yen continues to gain on safe haven flows. USD/JPY had largely been in a 145-150 range since mid-February but has now broken lower to trade as low as 142.05 today. We could potentially see a new 140-145 range, but if these market stresses continue, we think the pair could test the September low near 139.60. At some point fairly soon, we would not be surprised to hear some official jawboning about excessive moves in the exchange rate, as USD/JPY has fallen nearly 6% since the end of March. A strong yen and 10% tariffs (the 24% reciprocal rate was paused) will be a strong headwind on the economy.
RBA Governor Bullock remains cautious. She stressed the “added unpredictability [of the ongoing US tariff announcements] means we need to be patient as we work through how all of this could affect demand and supply globally.” Bullock added “we are mindful of not adding to the uncertainty, and to that end, it’s too early for us to determine what the path will be for interest rates.” The market has already adjusted to price in 125 bp of total easing over the next 12 months. Meanwhile, the market has fully priced in a 25 bp cut at the next meeting May 20 as well as nearly 45% odds of a 50 bp cut then.
China announced it will increase tariffs on US goods imports to 125%. This latest move comes after the US said tariffs on Chinese imports stood at 145% rather than the 125% that most assumed. However, the Ministry of Finance added that “Given that American goods are no longer marketable in China under the current tariff rates, if the US further raises tariffs on Chinese exports, China will disregard such measures.” Elsewhere, the Commerce Ministry said the escalating tariffs by the US have become meaningless and added “It’s become a joke.” What’s not a joke is that escalating US-China trade war is a major blow to the global economy and can further weigh on risk assets in the near-term.
