The dollar is still trading sideways ahead of the tariff announcement. DXY is trading flat near 104.21 as markets await the reciprocal tariff announcement at 4 PM ET. The possible outcomes vary wildly (see below) and so too will the market reactions. For now, markets are in a holding pattern. USD/JPY is trading lower near 149.45. Elsewhere, both the euro and sterling are trading largely unchanged near $1.08 and $1.2935, respectively. Fed officials are starting to talk about the downside risks of tariffs (see below), with the swaps market now pricing in nearly 100 bp of easing over the next 12 months. That and the soft data are keeping a lid on dollar bounces ahead of key jobs report Friday. Today’s data highlight will be on ADP private sector jobs (below).
AMERICAS
Reciprocal tariffs are due to be announced at 4 PM ET. As of this writing, it appears that the tariff plans have not been finalized even though President Trump claimed they have been “settled.” According to the Wall Street Journal, the Trump administration is looking at three options: 1) a 20% universal tariff on virtually all imports, 2) a reciprocal plan that would apply different tariffs to different countries, 3) across-the-board tariffs on a subset of nations that likely would not be as high as the 20% universal tariff option. Obviously, the different outcomes will have wildly different implications. Whatever happens, though, Fed Chair Powell claim that tariff-related inflation will be transitory is sure to be tested by the markets.
March vehicle sales surged. Sales came in at an annual rate of 17.77 mln vs. 16.20 mln expected and 16.00 mln in February. This was the highest rate since April 2021 and suggests solid headline retail sales for March. Since the jump was due to buyers front-running the tariffs, we expect sales to soften in the coming months. This is yet another example of how tariffs and tariff threats are causing distortions in the economy that quite frankly makes it very difficult to get a read on the underlying trends. As Atlanta Fed Bostic warned, we may not get any clarity until late spring/early summer.
Fed officials are starting to focus on the downside risks from tariffs. Barkin noted of the tariffs that “Obviously some amount of that will pass through into prices and so that will be inflationary.” However, he added that “If you are a company that can’t raise prices, then your margin goes down. You’re going to start working on operational efficiencies, and that means headcount.” Elsewhere, Goolsbee said “If the consumer stops spending or business stops investing because they’re uncertain or they’re afraid where we’re headed, that would be a bit of a mess.” We concur. Kugler speaks today. As recession risks rise, the swaps market is close to pricing in four Fed cuts over the next 12 months, up from three in mid-March, two in late February, and one in mid-January.
ADP private sector jobs estimate will be the data highlight. Headline is expected at 120k vs. 77k in February. Bloomberg consensus for NFP Friday is at 140k while its whisper number stands at 111k, with both creeping higher in recent days. Given ongoing signs of strength in other labor market indicators, we lean more towards the former than the latter. For reference, payroll job gains averaged 168k per month over the past 12 months while the breakeven pace of job gains needed to keep the unemployment rate stable is between 80-100k.
February JOLTS data suggest a softening labor market. Job openings came in at 7568k vs. 7658k expected and a revised 7762k (was 7740k) in January. The openings rate fell two ticks to 4.5%, right at the threshold below which one typically sees a significant increase in the unemployment rate. The layoffs rate remained steady at 1.1%, suggesting there is no layoff spiral underway, while the hirings rate remained steady at 3.4%. March Challenger jobs cuts and weekly claims will be reported Thursday.
March ISM manufacturing PMI was soft. Headline fell to a four-month low of 49.0 vs. 49.5 expected and 50.3 in February. The details point to heightened risks of stagflation. New orders and employment dropped deeper into contractionary territory, while prices paid surged to 69.4, the highest since June 2022. ISM services PMI will be reported tomorrow and headline is expected at 52.9 vs. 53.5 in February. The regional Fed services surveys suggest risk are skewed to the downside. Of note, the S&P Global services PMI increased 3.3 points to a three-month high of 54.3 in March.
The growth outlook is still diverging. The Atlanta Fed GDPNow model estimates Q1 at a whopping -3.7% SAAR and will be updated tomorrow after the data. When adjusted for trade in gold, it improves to -1.4% SAAR. Elsewhere, the New York Fed Nowcast model estimates Q1 growth at 2.9% SAAR and Q2 growth at 2.6% SAAR and will be updated Friday. Due to different statistical methodology, the Atlanta Fed model tends to react more to individual data points and is more volatile than the New York Fed model. Q1 has drawn to a close but we won’t get official GDP data until April 30.
EUROPE/MIDDLE EAST/AFRICA
ECB President Lagarde sounded cautious. She said that predictability is in “very short supply” at the moment and added that “what we know is that it will not be good for the global economy and it’ll not be good for those who inflict the rates and or those who retaliate. It’s going to unsettle the trade world as we know it.” Recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live. However, markets are pricing in about 75% odds of a 25 bp cut to 2.25% at the next meeting April 17. We fully expect the ECB to deliver a cut next month to preempt the drag to growth from U.S. tariffs. Still, looser fiscal policy in Germany and the EU’s military build-up plan lessens the need for the ECB to cut rates more than is currently priced in (roughly 50 bp of total easing over the next 12-months but with nearly 50% odds of another 25 bp cut).
National Bank of Poland is expected to keep rates steady at 5.75%. At the last meeting March 12, the bank kept rates steady and reiterated that “inflation this year will remain markedly above the NBP inflation target.” Earlier this week, March headline inflation came in at 4.9% y/y vs. 5.1% expected and 4.9% in February. Governor Glapinski added “the inflation target is a compass for monetary policy. This compass clearly now shows that there’s no basis to change interest rates.” Despite the hawkish comments, the swaps market is pricing in 125 bp of easing over the next 12 months. This looks too optimistic considering given the inflation trajectory.
ASIA
Bank of Japan Governor Ueda sounded cautious. He noted that “Depending on the size and area of the tariffs, it’s possible they’ll have a large impact on trade activities among nations. Another big point is how household and business sentiment will be affected by them, influencing overall spending.” Most importantly, Ueda said “It’s unfortunate but uncertainties are high so we will be closely watching developments of policies to grasp their economic impacts more precisely.” This suggests that the heightened uncertainty is likely to keep the BOJ on hold for now and so we believe markets are correct in pricing in the next hike in September.
Reports suggest China is taking steps to restrict its companies from investing in the U.S. The National Development and Reform Commission has reportedly been instructed to hold off on the process of registering and approving Chinese investment in the U.S. While no further details are available, this would be one of the many ways in which a trade war can morph into a wider conflict that goes beyond just tariffs. Stay tuned.
