Gold Digger

Worries over escalating trade tensions is leading to a flight to safety. Global equity markets are selling off, bonds are rallying, and gold soared to a record high. USD is firm but underperforming against the “safe haven” JPY.

Nevertheless, heightened uncertainty around the US growth outlook is not USD positive. Richmond Fed President Tom Barkin (non-FOMC voter) warned yesterday that “the feeling of uncertainty is undeniable…A dense fog has fallen. It’s not an everyday “forecasting is hard” type of fog. It’s a “zero visibility, pull over and turn on your hazards” type of fog.”

The US February Personal Income and Outlays report takes the spotlight today (12:30pm London). Headline PCE is expected at 2.5% y/y vs. 2.5% in January and core PCE is projected at 2.7% y/y vs. 2.6% in January. The Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.4% and 2.6%, respectively. The median FOMC 2025 forecast for headline PCE inflation was raised two ticks to 2.7% while core PCE inflation was raised three ticks to 2.8%. According to Powell “a good part” of the marked-up inflation comes from the effects of tariffs.

Personal spending is expected to recover after being negatively affected by the cold weather in January. Personal spending is expected at 0.5% m/m vs. -0.2% in January, and real personal spending is forecast at 0.3% m/m vs. -0.5% in January. The mixed February retail sales report and worsening consumer confidence point to softer consumer spending activity. Indeed, the Atlanta Fed GDPNow model forecasts Q1 real personal consumption expenditures growth declined from 1.1% to 0.4%. The next GDPNow model updated is today.

The final March University of Michigan sentiment index will also be of interest, especially long-term inflation expectations (2:00pm London). The preliminary March print showed inflation expectations 5-10yrs out surged to a 32-yr high at 3.9%. Unanchored survey-based measures of inflation expectations will complicate the Fed’s job to bring about disinflation without a significant slowing of the economy or high unemployment.

UK

GBP/USD is consolidating just under 1.3000. UK retail sales unexpectedly rises for a second consecutive month in February. Retail sales volumes increased by 1.1% m/m (consensus: -0.5%) following an increase of 1.6% in January (revised down from 2.1%). Excluding automotive fuel, retail sales volumes surged 1.0% m/m (consensus: -0.4%) vs. 1.4% in January (revised down from 1.7%).

The details were good and suggests underlying consumer spending activity is picking up. Non-food stores – the total of department, clothing, household and other non-food stores – accounted for all the pick-up in retail sales, while food stores fell. In our view, low odds the UK enters a period of stagflation suggests GBP/USD will hold above its 200-day moving average at 1.2804.

The final Q4 2024 UK GDP print confirmed the economy grew 0.1% q/q following a similar rise in Q3. Meanwhile, the UK current account deficit, excluding volatile precious metals trade, widened to -2.6% of GDP in Q4 from -2.0% in Q3. Regardless, attracting foreign savings to finance this deficit is not an issue especially with GBP trading at a deep discount to fundamental equilibrium. Our PPP model estimates GBP/USD fundamental equilibrium at around 1.5000.

EUROZONE

EUR/USD is struggling to sustain a move above 1.0800 with the next important support offered at 1.0727, the 200-day moving average. The ECB February consumer inflation expectations survey is the domestic focus (9:00am London). 1-year expectations is forecast at 2.5% vs. 2.6% in January while 3-year expectations is projected at 2.4% vs. 2.4% in January. With longer-term inflation expectations still well anchored around 2%, the ECB has scope to deliver on market expectations for 50bps of easing over the next 12 months.

In our view, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to slash rates more than is currently priced-in which is EUR supportive.

Next week’s Eurozone preliminary March CPI will help shape expectations for the ECB April 17 policy rate decision. Softer preliminary March EU harmonized CPI inflation in Spain and France point to downside risk to the bloc’s inflation data. The swaps markets price-in 75% odds of a 25bps cut to 2.25%. But recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live.

JAPAN

USD/JPY dipped under 150.50 after testing a multi-week high around 151.21. The Tokyo March CPI, a leading indicator for nationwide inflation, overshot expectations but does not move the needle on BOJ rate hike expectations. Headline, core ex-fresh food, and core ex-fresh food & energy inflation ran hot at 2.9% y/y (consensus: 2.7%, prior: 2.8%), 2.4% y/y (consensus: 2.2%, prior: 2.2%), and 2.2% y/y (consensus: 1.9%, prior: 1.9%).

Nevertheless, the BOJ is unlikely to tighten policy by more than is currently priced-in which limits JPY upside. The swaps market continues to imply about 50bps of rate hikes over the next twelve months.

In fact, the BOJ Summary of Opinions of the March meeting highlights that policymakers continue to favor a very gradual approach to rate hikes. One member noted “it is appropriate to examine how economic activity and prices respond to the new policy interest rate of around 0.5 percent.” One member pointed out it will take time for the effects of the recent changes in the policy interest rate “to be fully transmitted to economic activity and for the Bank to examine these effects.” One member warned that “downside risks to Japan's economy have increased, with high uncertainties regarding factors such as U.S. tariff policy…”

Recall, at the March meeting, the BOJ left the policy rate unchanged at 0.50% as was widely expected. The decision was unanimous. BOJ Governor Ueda reiterated the bank’s guidance that it would continue to raise the policy interest rate if the outlook for economic activity and prices will be realized, adding real interest rate is very low.

CANADA

USD/CAD is firmer above 1.4300 and trading around the levels before the first US tariffs announcement against Canada on February 1. Canada’s unfavorable economic growth outlook can further weigh on CAD.

Canada’s January GDP print is the highlight (12:30pm London). Statistics Canada advance information indicates that real GDP by industry increased 0.3% m/m after rising 0.2% in December. The February GDP estimate will be published at the same time and will likely point at deteriorating economic activity. Bank of Canada (BOC) Governor Tiff Macklem warned that the pervasive uncertainty of US trade policy is “already causing harm” to the Canadian economy.

NEW ZEALAND

NZD/USD is trading at the bottom of this week’s narrow 0.5710-0.5760 range. New Zealand March ANZ consumer confidence was disappointing. Consumer confidence dipped 3.2 points to a five-month low at 93.2 and remains below long-run average of 113.5. Additionally, the proportion of households thinking it’s a good time to buy a major household item, the best retail indicator, eased 1 point to -16, matching the January low.

Bottom line: the RBNZ has room to deliver additional rate cuts which is an ongoing headwind for NZD. RBNZ has penciled-in another 75bps of easing over the next 12 months that would see the policy rate bottom at 3.00%. This is roughly in line with market pricing.

AUSTRALIA

AUD/USD is trading near the middle of this week’s 0.6270-0.6330 range. Australia’s Prime Minister Anthony Albanese has called an election for May 3. Albanese’s center-left Labor government has been neck-and-neck in the polls with Peter Dutton’s center-right Liberal-National coalition.