The dollar continues to weaken. DXY is trading lower for the third straight day near 99.743 as the two-day FOMC meeting gets under way. USD/JPY is trading lower near 143.15 as both the US and Japan struggle to strike a trade deal (see below). Elsewhere, the euro is trading flat near $1.1320 despite some political uncertainty out of Germany (see below) and sterling is trading higher near $1.3335. TWD is weaker after central bank intervention (see below). We continue to view any dollar relief rallies with skepticism, with recent gains unlikely to be sustained no matter how the U.S. data come in. Indeed, recent firm data have pushed out Fed easing expectations and yet the dollar is softer. Tomorrow’s FOMC decision is unlikely to throw the greenback a lifeline (see below).
AMERICAS
The two-day FOMC meeting begins today and should end tomorrow with a widely expected hold. There will be no updated macro forecasts or Dot Plots until the June 17-18 meeting. While the Fed should not give any hints about easing, the risk is that Chair Powell tilts dovish as survey data point to a worsening U.S. growth outlook. On the other hand, the April jobs report supports the view that the Fed can afford to remain patient. Indeed, the next cut is not fully priced until July. With the 90-day pause in reciprocal tariffs set to end in early July, even that month seems too soon for a cut given the ongoing uncertainty regarding the tariff impact. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 month, down from 125 bp that was priced in last week.
April ISM services PMI readings suggest the economy remains fairly resilient. Headline came in at 51.6 vs. 50.2 expected and 50.8 in March. The details weren't so great, as activity fell to 53.7, the lowest since June 2024, while prices paid rose to 65.1, the highest since January 2023. This is not an ideal combination, to state the obvious. Elsewhere, employment rose to 49.0 but remains in contractionary territory.
The Q2 growth outlook remains mixed. The Atlanta Fed GDPNow model has Q2 growth at 1.1% SAAR vs. the initial estimate of 2.4%. It will be updated today after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.3% SAAR and will be updated Friday, while its initial Q3 estimate will come at the end of May. For those keeping score at home, the gold-adjusted Atlanta Fed GDP model’s Q1 estimate of -1.5% SAAR was the closest to the actual initial Q1 reading of -0.3%, and that gold-adjusted model is now the standard one.
March trade data will be the highlight today. The deficit is expected at -$137.2 bln vs. -$122.7 bln in February. Another large deficit would lead to a downward revision to Q1 GDP growth. Of note, the advanced goods trade data posted a -$162 bln deficit in March vs. -$147.9 bln in February.
Canada April PMIs have been soft so far. S&P Global services and composite PMIs came in at 41.5 and 41.7, respectively. Both were down from March and are making new cycle lows. Last week, its manufacturing PMI came in at 45.3 vs. 46.3 in March. Ivey PMI will be reported today. Softness in the data has the swaps market looking for 50 bp of further easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
German conservative leader Merz failed to get the parliamentary majority needed to become Chancellor. Merz received 310 votes in the 630-seat Bundestag, six short of the necessary majority. The Bundestag now has 14 days to elect a candidate with an absolute majority. Any candidate that secures an absolute majority in this period becomes Chancellor. If no one is elected in 14 days, a final vote is held. Again, any candidate that wins an absolute majority becomes Chancellor. If a candidate wins a plurality, the President has two options: appoint that candidate as Chancellor or dissolve the Bundestag and trigger new elections. Ultimately, Merz should be elected. The political uncertainty will not derail Germany’s game changing fiscal outlook, as parliament already approved in March plans for a massive defense and infrastructure spending surge.
Eurozone reported firm final April services and composite PMIs. Headline rose three ticks from the preliminary to 50.4. Looking at the country breakdown, the German composite rose four ticks from the preliminary to 50.1 while the French composite rose five ticks from the preliminary to 47.8. Italy and Spain report for the first time and their composite PMIs came in at 52.1 and 52.5, respectively. The improving health of the eurozone economy ties in with the notion that U.S. exceptionalism has ended.
ASIA
U.S.-Japan trade talks are proving to be quite tough. Reports suggest that the U.S. wants to maintain 25% tariffs on auto and metal exports from Japan no matter what, while Japan is pushing for a comprehensive deal that lowers all tariffs. Other reports suggest that with regards to the reciprocal tariffs, the U.S. has told Japan that it rejects full exemptions for Japan from both the 10% baseline rate and the 14% Japan-specific rate. Despite the positive spin from both sides, it’s clear that big differences remain. Most importantly, we think the key takeaway is that no matter what trade deals are struck, no country should expect a move back to pre-April 2 levels.
Caixin reported soft services and composite PMIs. Services came in more than a full point lower than expected at 50.7 vs. 51.9 in March. As a result, its composite PMI fell to 51.1 vs. 51.8 and was the lowest since January. With the trade war clearly hurting the mainland economy, deflation risks remain elevated and so we expect more stimulus measures in the coming weeks.
TWD retraced some of its historic gains on central bank intervention. Central bank Governor Yang stated that the bank had “intervened appropriately” after TWD surged the most since the 1980s. The sharp rally in TWD was sparked by speculation Taiwan authorities will allow TWD to appreciate as part of a possible trade deal with the U.S. Unsurprisingly, Taiwan’s central bank governor denied that the U.S. asked Taiwan to lift the value of its currency. Elsewhere, central bank officials say they are monitoring for any hot money flows and noted that major life insurers have not conducted any large-scale hedging activity that may have fed into the TWD rally.
Currency appreciation in exchange for trade accord is one of our central global macro themes. Specifically, a grand bargain between the U.S. and China – one that devalues the dollar against the Chinese renminbi (CNY) – is a possibility that markets are not pricing in. This could help President Trump achieve his core goal to revitalize American manufacturing activity and help China rebalance its economy away from investment towards consumption. See here for details.
