The dollar was mostly weaker against the majors last week. JPY, CAD, and SEK outperformed while EUR, GBP, and CHF underperformed. The dollar rallied on Friday on reports that Trump would announce reciprocal tariffs this week on all U.S. trading partners. It seems that rather than announce universal tariffs, Trump would instead put “the exact same tariff” on those countries that are levying tariffs on U.S. goods. Reciprocal tariffs, along with U.S. inflation and retail sales data this week, should keep the Fed on hold for the foreseeable future even as other central banks are easing. These drivers should help push the dollar higher.
AMERICAS
The trade wars are back on. On Friday, President Trump announced reciprocal tariffs. Specifically, he said that “I’ll be announcing that next week - on reciprocal trade - so that we’re treated evenly with other countries. We don’t want any more or any less.” It seems that the U.S. will put the exact same tariffs on those countries that have tariffs on U.S. goods. Trump later added that “I think that’s the only fair way to do it. That way, nobody’s hurt. They charge us. We charge them. It’s the same thing. I seem to be going in that line as opposed to a flat fee, tariff.” Of course, things can always turn on a dime but this confirms our belief that tariffs, perhaps delayed, are still coming. This will keep the Fed even more cautious.
Fed Chair Powell’s semi-annual testimony before Congress will be the highlight. He testifies Tuesday before the Senate Banking Committee and then again Wednesday before the House Financial Services Committee. We expect Powell to take the same cautious tone as he did at the January FOMC meeting. Powell will surely be asked about the impact of tariffs on Fed policy. With more and more possible tariff details coming to light, we think it will be difficult for Powell to dodge the question. Other Fed officials speak. Hammack, Williams, and Bowman speak Tuesday. Bostic and Waller speak Wednesday. Logan speaks Friday.
January CPI data will be reported Wednesday. Headline is expected to remain steady at 2.9% y/y, while core is expected to fall a tick to 3.1% y/y. Of note, the Cleveland Fed’s Nowcast model estimates headline and core at 2.9% and 3.1%, respectively. Looking, that model estimates February headline and core at 2.6% and 3.0%, respectively. Survey-based measures of consumer inflation expectations confirm perceptions that progress on inflation may be stalling well above 2%. February University of Michigan 1-year inflation expectations surged a full percentage point to a 13-month high of 4.3% while 5- to 10-year expectations rose one tick to 3.3%, the highest since June 2008. New York Fed inflation expectations for January will be reported Monday.
January PPI will be reported Thursday. Headline is expected to fall a tick to 3.2% y/y, while core is expected to fell two ticks to 3.3% y/y. Keep an eye on PPI services ex-trade, transportation, and warehousing because it feeds into the PCE calculations. In December, this measure of core services PPI fell to a 13-month low of 4.1% y/y vs. 4.7% in November.
January retail sales data Friday will also be important. Headline is expected at -0.1% m/m, while ex-autos is expected at 0.3% m/m vs. 0.4% in December. The so-called control group used for GDP calculations is expected at 0.3% m/m vs. 0.7% in December. Overall, consumer spending is supported by positive real wage growth, healthy labor market and strong household balance sheets. December business inventories and January industrial production are also due Friday.
Growth remains robust. The Atlanta Fed GDPNow model's estimate for Q1 growth is at 2.9% SAAR and will be updated Friday after the data. The latest Q1 estimate from the NY Fed Nowcast model is at 3.1% SAAR and will also be updated Friday, while its initial forecast for Q2 growth will come in early March.
Bank of Canada releases its summary of deliberations for the January meeting Wednesday. At that meeting, the BOC cut rates 25 bp to 3.00%. The bank also announced technical changes to its monetary policy implementation framework and signaled that the bar for additional easing is high. The BOC reiterated that “the cumulative reduction in the policy rate since last June is substantial” and lifted inflation projections for 2025 and 2026. Nonetheless, markets expect the BOC to deliver more rate cuts, which is an ongoing drag for CAD. We agree. The swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 2.50%.
EUROPE/MIDDLE EAST/AFRICA
The ECB updated its estimate of the neutral rate. The bottom of the neutral rate range is now seen between 1.75-2.25% vs. 1.5% previously, while the upper end is still seen at 3.00%. Regardless, markets continue to price in 75 bp of easing over the next 12 months that would see the policy rate bottom near 2.00%, which is consistent with the lower end of the new neutral range estimate. Lagarde speaks Monday. Schnabel speaks Tuesday. Elderson and Nagel speak Wednesday. Cipollone and Nagel speak Thursday. Panetta speaks Saturday.
The U.K. monthly data dump begins. Q4 GDP as well as December GDP, IP, services, and construction will all be reported Thursday. December GDP is expected to remain steady at 0.1% m/m but risks are skewed to the downside as the composite PMI suggests growth momentum has stalled. Q4 GDP is expected at -0.1% vs. flat in Q3, reflecting a deterioration in business confidence and flat household consumption growth. Beyond Q4, the Bank of England’s updated macroeconomic projections point to a near-term stagflation backdrop, which is a drag for GBP. Its Q1 2025 growth projection was slashed to 0.4% y/y vs. 1.4% previously, while its Q1 2025 inflation forecast was raised to 2.8% y/y vs. 2.4% previously.
There are several key Bank of England speakers this week. MPC member Mann’s speech Tuesday will be closely watched. Mann was a staunch hawk on the MPC and so it was big shock when she voted for a 50 bp cut last week while the majority favored a 25 bp cut to 4.50%. Mann will no doubt unpack the reasoning behind her policy stance change. Interestingly, the BOE minutes highlighted that for one of the two members that voted for a 50bps cut “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom.” Mann is an outspoken proponent of an activist monetary policy strategy. In the current economic cycle, this strategy implies keeping rates on hold for longer until there are clear signs the remaining persistence in inflation dissipates. Once inflation persistence has been purged, it would then be appropriate to ease fast and forcefully. The fact she voted for a jumbo cut last week signals she sees a sharp slowdown in inflation. Governor Bailey also speaks Tuesday and MPC member Greene speaks Wednesday.
Switzerland highlight will be January CPI data Thursday. Headline is expected to fall two ticks to 0.4% y/y while core is expected to fall a tick to 0.6% y/y. If so, headline would be the lowest since April 2021 and move further below the 2% target. At its December meeting, the Swiss National Bank cut rates 50 bp to 0.50% but scrapped previous reference that “further cuts in the SNB policy rate may become necessary in the coming quarters.” Still, the swaps market is pricing in an additional 50 bp of easing over the next 12 months that would see the policy rate bottom at 0%. The SNB will likely pause its easing cycle if headline CPI inflation tracks at or above its Q1 forecast of 0.3% y/y. If so, a near-term CHF rally could unfold.
Norway highlight will be January CPI data Monday. Headline is expected to remain steady at 2.2% y/y while underlying CPI is expected to fall a tick to 2.6% y/y. If so, headline would remain just above the 2% target. At its January meeting, the Norges Bank kept rates steady at 4.5% and reiterated that “the policy rate will most likely be reduced in March.” Updated macro forecasts will come at that meeting. Markets have fully priced in the start of an easing cycle then as inflation is tracking below the Norges Bank projection. Furthermore, the swaps market pricing in 75 bp of easing over the next 12 months followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom near 3.50%.
ASIA
Japan highlight will be December current account data Monday. An adjusted surplus of JPY2.721 bln is expected vs. JPY3.033 trln in November. However, the investment flows will be of more interest. The November data showed that Japan investors became net buyers of U.S. bonds (JPY993 bln) after one month of net selling. Japan investors stayed net sellers (-JPY267 bln) of Australian bonds for the third straight month and also stayed net sellers of Canadian bonds (-JPY151 bln) for the third straight month. Investors turned net buyers of Italian bonds (JPY248 bln) after one month of net selling. Overall, Japan investors turned total net buyers of foreign bonds (JPY367 bln) after one month of net selling. With the return to net buying, it’s still too early to say that Japan investors have stopped chasing higher yields abroad.
Q1 RBNZ inflation expectations survey will be reported Thursday. Firms’ inflation expectations are now close to 2% across all time horizons, leaving plenty of room for the RBNZ to deliver a 50 bp cut to 3.75% next week. Looking ahead, the swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 3.0%. Bottom line: wider NZ-US 2-year bond yield spreads can further weigh on NZD.
