Markets Stay Unsettled

Global stock markets remain under downside pressure and bonds continue to rally. The trade war is a major blow to the global economy and can further weigh on risk assets in the near-term. IMF Managing Director Kristalina Georgieva warned that the announced tariff measures “clearly represent a significant risk to the global outlook at a time of sluggish growth.”

Crude oil prices plunged by over 8% after OPEC+ increased supply by three times the planned amount in May. The official reason behind the surprise decision is “the continuing healthy market fundamentals and the positive market outlook.” The unofficial reason is that Saudi Arabia wants to drive down crude oil prices to punish members (notably Kazakhstan and Iraq) who have for many months been producing excess oil beyond their quota.

USD has stabilized after slumping to its lowest level since early October. The safe haven JPY and CHF are outperforming while risk-sensitive currencies are underperforming. Specifically, AUD/USD and NZD/USD have pulled back all of yesterday’s gains. This is what you would expect in the current risk off environment. Nonetheless, the USD outlook is bleak for three reasons:

(i) The Trump administration implicit support for a weaker dollar. One of President Donald Trump’s main objectives with reciprocal tariffs is to revitalize the American manufacturing sector. A weaker dollar would help the US economy pivot away from consumption towards manufacturing as it acts like a tax on consumption and a subsidy on manufacturers.

(ii) Heightened risk the US falls into stagflation. The Atlanta Fed GDPNow model adjusted for imports and exports of gold is tracking Q1 growth of -0.8% SAAR vs. -1.4% on April 1. Additionally, activity indices from the ISM surveys worsened in March. The ISM manufacturing index fell 1.3 points to a four-month low at 49.0 and the ISM services index dropped 2.7 points to a nine-month low at 50.8.

Meanwhile, progress on inflation is stalling above the Fed’s 2% goal. Core PCE inflation was 2.8% y/y in February, the same level seen over Q4, and the price indices from the ISM surveys point to upside risk to inflation.

(iii) Growing loss of confidence in US policymaking. Reports have emerged that the country-specific tariffs were not based on evidence or objective analysis. This can have a corrosive effect on the quality of decision-making across public policy.

Fed officials are sticking to the the Fed’s “no hurry to resume easing” script. Yesterday, Fed Vice Chair Philip Jefferson noted “In my view, there is no need to be in a hurry to make further policy rate adjustments”, and Fed Governor Lisa Cook stressed “for now, we can afford to be patient but attentive.” Nevertheless, Cook warned she currently place “more weight on scenarios where risks are skewed to the upside for inflation and to the downside for growth. Such scenarios, with higher initial inflation and slower growth, could pose challenges for monetary policy.”

Fed Chair Jay Powell takes the spotlight today (4:25pm London). We expect Powell to be grilled on his “base case” that the inflationary effect from tariffs will be transitory. A couple of regional Fed Presidents, notably Musalem and Barkin, have warned that the impact of tariff increases on inflation may not be entirely temporary.

Ahead of Powell’s keynote speech, the focus will be on the US March non-farm payrolls report (1:30pm London). Non-farm payrolls (NFP) are expected at 140k vs. 151k in February, consistent with a healthy labor market. Risks are skewed to the downside because of the decline in the ISM employment indices. A poor non-farm payrolls print will further weigh on Treasury yields and undermine USD.

Otherwise, the US unemployment rate is projected to be unchanged at 4.1% which would track below the Fed’s 2025 projection of 4.4%. Average hourly earnings are forecast at 4.0% y/y vs. 4.0% in February. Overall, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%.

CANADA

USD/CAD clawed-back some of yesterday’s sharp losses. The severe negative impact of the US tariffs on the Canadian economy and lower crude oil prices do not bode well for CAD. Yesterday, Prime Minister Mark Carney confirmed that Canada will put 25% retaliatory tariffs on US-made vehicles that are not compliant with the United States-Mexico-Canada Agreement (USMCA).

Canada’s March labor force survey is the domestic data highlight (1:30pm London). Consensus sees a 10k rise in jobs vs. 1.1k in February, while the unemployment rate is expected at 6.7% vs. 6.6% in February. The labor market outlook is not pretty. Heightened trade uncertainty has led many businesses to scale back their hiring according to a Bank of Canada (BOC) survey. Markets price-in 40% odds of a follow-up 25bps BOC policy rate cut at the next April 16 meeting and a total of almost 75bps of easing over the next 12 months.

SWEDEN

USD/SEK retraced most of yesterday’s loss. Sweden’s March CPI print was mixed. The policy relevant CPIF came in at 2.3% y/y (consensus: 2.6%) vs. 2.9% in February while CPIF Ex-energy printed at 3.0% y/y (consensus: 3.2%) vs. 3.0% in February. Nonetheless, inflation is tracking the Riksbank projection and argues against more policy rate cuts. At its March 20 meeting, the Riksbank kept the policy rate steady at 2.25% and signaled it was done easing. The implication is that US-Sweden 2-year bond yields spreads can further weigh on USD/SEK.

EUROZONE

EUR/USD is consolidating around 1.1050 after testing a multi-month high near 1.1145 yesterday. The ECB Account of its March 5-6 policy meeting suggests the decision to cut or pause in April will be live. The Account stressed that it was important that the message from the statement “should not be interpreted as sending a signal in either direction for the April meeting, with both a cut and a pause on the table, depending on incoming data.”

We expect the ECB to deliver a 25bps cut to 2.25% at its April 17 meeting (73% priced-in) to pre-empt the drag to growth from US tariffs. 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%. Bottom line: the likelihood for a modest upward adjustment to ECB rate expectations is EUR supportive.

On a side note, we do not buy the argument that the ECB will crank-up easing to prevent EUR appreciation from tightening domestic financial conditions. EUR/USD is trading around long term fundamental equilibrium which we estimate at 1.1100. As such, EUR/USD has room to overshoot equilibrium without causing material harm to the Eurozone economy.