STIR: Balance of Risks Still Tilts Heavily In Favour Of June ECB Cut

Looking ahead to next week:

• Two of the Fed's most senior leaders speak on the economic outlook in the coming week: Gov Waller on Monday and Chair Powell on Wednesday. This will be the first commentary by both since the April 9 Trump administration announced a reciprocal tariff "pause" with a large hike in the Chinese levy, and associated bond / swap market turmoil.
• It's doubtful Powell will shift his approach on monetary policy versus his April 4 appearance when he said "it feels like we don't need to be in a hurry" to cut rates, but there will be attention paid to whether his tone reflects those of other Fed officials who have sounded increasingly cautious about the upside risks to inflation and downside risks to growth. Additionally, any discussion of how the Fed views volatility in Treasury markets by Waller or Powell will be closely eyed.
• March retail sales (Wednesday) is the week’s key data release: it’s expected to show a large sequential acceleration (1.4% M/M consensus vs 0.2% in Feb), with growth in the key Control Group reading remaining strong at 0.7% (1.0% prior). Should these expectations be met, it will add to the tension between solid incoming data and weaker sentiment indicators – and ultimately will be assessed for whether it represents tariff front-running more than continued strength in consumer demand.
• Meanwhile, the NY Fed’s consumer expectations survey will be watched for any corroboration of the soaring inflation concerns evident in recent UMichigan reports.

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• Tariff-driven volatility in policy, macro and markets continued this week, punctuated by President Trump’s surprise announcement of a 90-day pause on the reciprocal tariffs he announced on April 2, imposing a flat rate of 10% on most partners while simultaneously hiking tariffs on China to 145%.
• The data in the week was something of a sideshow in comparison, but if anything it showed that prior to the tariff escalation, the economy was on track for something resembling a “soft landing”.
• March's main CPI aggregates all surprised lower, with a notable below-expected supercore the lowest since Mar 2021, and producer prices likewise coming in soft.
• And while Q1 GDP is still tracking to be weak (negative, per Atlanta Fed GDPNow), “hard” data continue to defy recessionary fears, including the latest weekly jobless claims.
• But as March turns into April, these data points are becoming stale as we could see a sharp shift in both the hard and the soft data. The UMichigan April survey of consumers was stark in this regard, showing the weakest sentiment and highest inflation expectations in 4 decades.
• Fed officials suggested that upside risks to inflation and downside risks to growth had increased versus their pre-tariff announcement assessments, arguing for a patient approach on rate cuts.
• The market reaction to recent events and data has been notable: for the week, the S&P 500 rebounded sharply, long-end Treasury yields soared (10Y Tsys by the most in any week since 2001), and the dollar fell sharply. The implication is that foreign investors are beginning to shun US assets given tariff-related uncertainty, adding further complexity to the macro outlook.
• Looking ahead to next week, March retail sales (Wednesday) is the key data release: it’s expected to show a large seque

• Treasuries look to finish weaker Friday, off late morning lows after the bell, curves bear flattening after posting steeper levels on the open.
• Tsy Jun'25 10Y futures currently trade 109-24 (-27) -- after breaching a couple levels of support to mark a session low ofg 109-08, curves flatter/off early highs: 2s10s currently -2.061 at 53.192 (65.521 high), 5s30s -8.343 at 71.171 (86.760 high). 10Y yield at 4.4797% +.0548 vs. 4.5864% high.
• Treasury futures moving off lows after lower than expected PPI (prior up-revised slightly): PPI readthrough for core PCE looked fairly neutral on net vs expectations - core PCE will likely come in slightly higher than core CPI as expected but there won't be a huge margin (0.06% M/M core CPI vs ~0.11% core PCE consensus pre-PPI, either way a pullback from 0.365% M/M core PCE in Feb)
• Treasury futures holding near lows after lower than expected UofM sentiment & higher than anticipated inflation expectations. To put April's UMich consumer sentiment and inflation expectations into long-term perspective: we're back to the early 80s for 5-10Y inflation expectations (6.7%), but overall consumer sentiment is even worse now than it was then (around record lows at 47.2 in April).
• Cross asset: Stocks hold moderate gains (SPX eminis 100.0 at 5401.0), Gold climbed to a new high of 3244.39, Bbg US$ index lower at 1234.71 (-11.55).