Tightrope

Worries over escalating trade tensions and the knock-on drag on growth have eroded risk appetite. Global equities are selling off, bonds are rallying, gold is soaring to new highs, and “safe haven” currencies are outperforming. On Tuesday, a trade review report prepared by the US Treasury, Trade and Commerce departments will be published followed on Wednesday by the hotly anticipated reciprocal tariff announcement.

USD faces headwinds because the Fed’s path to bring about disinflation without a significant slowing of the economy or high unemployment is narrowing. The US growth outlook is increasingly cloudy and there’s some loosening in inflation expectations.

Advanced indicators for Q1 US GDP growth are sending diverging signals. The Atlanta Fed GDPNow model estimates Q1 growth at -2.8% SAAR, down from -1.8% on March 26. The same model adjusted for imports and exports of gold is tracking Q1 growth of -0.5% SAAR, down from 0.2% on March 26. In contrast, the New York Fed's Nowcast model is more favorable and tracking Q1 growth at 2.9% SAAR as of March 28 vs. 2.7% on March 21. This week’s US job and ISM data could help pierce the haze clouding the growth outlook.

Indicators of US inflation expectations are mixed. Market based measures of inflation expectations like the 5y5y inflation swaps are well anchored around 2.5% but consumer survey of inflation expectations 5-10yrs out surged to 4.1% in March, the highest since February 1993!

EUROZONE

EUR/USD is trading firmly above 1.0800. Italy and Germany report EU harmonized CPI March data today (10:00am & 1:00pm London, respectively). Italy headline CPI is expected to rise 0.1pts to 1.8% y/y while Germany’s is projected to fall 0.2pts to 2.4% y/y. Last week, headline CPI for France was 0.2pts lower than expected at 0.9% y/y vs. 0.9% in February while Spain’s was 0.3pts lower than anticipated at 2.2% y/y vs. 2.9% in February. Bottom line: the Eurozone disinflationary process remains well on track.

Markets price-in about 85% odds of a 25bps ECB cut to 2.25% at the April 17 meeting. Recent comments from a handful of ECB policymakers suggests the decision to cut or a pause in April will be live. We expect the ECB to deliver a cut next month 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 more than is currently priced-in (roughly 50bps of total easing over the next 12-months with nearly 50% odds of another 25bps cut). The likelihood for a modest upward adjustment to ECB rate expectations is EUR supportive.

CHINA

USD/CNH is drifting lower. China economic activity edged up in March. The composite PMI increased to a three-month high at 51.4 vs. 51.1 in February driven by a pick-up in manufacturing and non-manufacturing growth momentum. The manufacturing PMI rose 0.3 points to a one-year high at 50.5 (consensus: 50.4) and the non-manufacturing PMI improved 0.4 points to three-month high at 50.8 (consensus: 50.6).

However, the growth outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity: low household income levels, high precautionary savings, and high levels of household debt.

JAPAN

USD/JPY is down at a multi-day low under 149.00 on heighted risk aversion and narrower US-Japan bond yield spreads. Japan’s Government Pension Investment Fund (GPIF) confirmed it will maintain its current portfolio composition for the next five years. GPIF has a 25% asset allocation across domestic and foreign stocks and bonds. However, the deviation limits to the target allocation will be narrower at +/-9% vs. +/-11% previously. JPY implications are negligible.

NEW ZEALAND

NZD/USD is trading heavy near its 100-day moving average at 0.5720, undermined by the sell-off in risk assets. The ANZ March business outlook survey was mixed. Business confidence dipped 0.9 points to 57.5 in March, while expected own activity rose 3.5 points to a three-month high at 48.6. Reported past activity, which has the best correlation to GDP, improved 3.7 points to 0.8 and remains indicative of a soft recovery in economic activity.

Bottom line: the RBNZ has room to deliver additional rate cuts. 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.

AUSTRTALIA

AUD/USD trading near the bottom a one-week range between 0.6270-0.6330. The RBA policy-setting announcement is due tomorrow (4:30am London). RBA is widely expected to keep cash rate target unchanged at 4.10%. At its February 18 meeting, the RBA trimmed the policy rate 25bps to 4.10% but signaled it’s not about to open the policy tap wide open. RBA Governor Michele Bullock stressed “I want to be very clear that today’s decision does not imply that further rate cuts along the lines suggested by the markets are coming.”

The RBA indicated it will pay particular attention to labor market development to guide future policy decision. The poor February labor market data supports the case for the RBA to slash rates again in May. Cash rate futures imply 73% odds of a 25bps cut in May while a cut at the July meeting is fully priced-in. The next Statement on Monetary Policy will be published at the May 20 meeting.