MACRO ANALYSIS: MNI U.S. Macro Weekly: Tariffs Take A Toll On Sentiment
Feb-21 19:37
We've just published our US Macro Weekly - Full Report Here
- The flash Services PMI for February was the most notable single macro data print of the week as it surprisingly slipped to its first sub-50 reading since Jan 2023. The press release noted a spike in input cost pressures but services inflation hit a five year low on a lack of pricing power.
- It was just one example among several surveys conducted in February that portrayed increasing uncertainty and inflation pressures, which appear to be reflecting the threat of tariffs and impact of other government policy shifts – a summary is below.
- Jobless claims were close to expected, with initial claims pointing to no sign of deterioration from last month’s payrolls reference period (at a healthy level), and unsurprisingly no sign of an increase from DOGE cuts. See below for detailed context around federal layoff/buy-out headlines.
- The minutes to the January FOMC meeting contained a surprising amount of discussion on balance sheet policy, potentially auguring a pause in QT – but it was no surprise that the FOMC expressed no hurry to cut rates again. The latter message was also conveyed by several members this week, including the first post-meeting commentary by St Louis Fed President Musalem, a hawk and 2025 voter.
- Fed rate cut expectations are again ending the week on the softer side, with more than 40bp of cuts priced for 2025, although a next cut is still only fully priced for the September meeting.
- The upcoming US economic calendar is backloaded, with the second release for Q4 national accounts on Thursday before the January PCE report on Friday.
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US TSY OPTIONS: Large Low Delta 10Y Put Buy, Opener
Jan-22 19:36
- +50,000 TYH5 102 puts 1 ref 108-18. Total volume in the OTM put only 2,900 coming into the session.
FED: MNI Hawk-Dove Spectrum Shifts, Easing Bias Remains Overall (2/2)
Jan-22 19:23
We’ve updated our Hawk-Dove Spectrum for 2025, with the rotation of regional president voters bringing in Chicago Fed’s Goolsbee (dove), KC’s Schmid (hawk), St Louis’s Musalem (hawk), and Boston’s Collins (neutral/dove) for 2024. (Out are the neutral/hawkish Bostic and Barkin, hawk Hammack, and neutral/dovish Daly).
- All participants remain on the dovish side of the Hawk-Dove line in absolute terms, reflecting the Committee’s overall easing bias.
- However most of the Dots have been moved in a more hawkish direction in the last 6 weeks, in light of the more limited cuts seen in the December Dot Plot and the growing sentiment that the FOMC can remain patient in deciding when to cut next.
- We now regard Hammack as the FOMC’s biggest hawk, though only marginally over her colleagues Bowman, Schmid and Musalem.
- Conversely, Gov Waller has ensconced himself as one of the pre-eminent doves on the Committee, seeing potential for 3-4 cuts this year, and possibly restarting the easing cycle earlier than market pricing implies (though he spoke after the December CPI data).
CANADA: Analyst USDCAD Scenarios Under Trump Tariffs
Jan-22 19:20
- CIBC: Full 25% tariffs look unlikely. They see USDCAD peaking at 1.461 and 1.468 with 10% tariffs or 1.478 and 1.496 with 20% tariffs under carve-outs for both energy and auto sectors or just for energy sectors.
- “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”
- DB: In a full 25% tariff scenario with no fiscal response, USDCAD should move to “at least 1.53, with a very real possibility that it tests the 2002 all-time highs of 1.61. By extension, USD/CAD is one of the most under-priced FX crosses for an FX trade war.”
- ING: “USD/CAD has been flat since the start of the year, and still embedding a 3% risk premium associated with the risk of Trump’s tariffs – according to our short-term fair value model. Even if unilateral 25% tariffs on Canada don’t materialise, smaller universal tariffs would still asymmetrically damage the economy of the main US trade partners. […] To rebound at this stage, CAD requires more reports suggesting a lighter-touch approach by Trump on trade. Barring that, we expect the risk premium to linger and some support around 1.430 in USD/CAD.”
- JPM: “1.55-1.58 is consistent with full pass-through from our USD tariffs beta [with permanent tariffs and no carve-outs]. […] But those elevated USD/CAD targets could prove temporary” if negative spillover back to the US impacts the USD leg, “providing some eventual offset to higher USD/CAD estimates.”
- “USD/CAD sub-1.40 is possible if no tariffs are ultimately introduced, risk premium is depriced, CAD shorts are trimmed, and less trade uncertainty allows other improving domestic factors to boost CAD.”
- MUFG: “If there’s no sign of negotiations or progress in negotiations and Trump keeps repeating his plans, we will see USD/CAD and USD/MXN jump notably higher. Our USD/CAD forecasts for Q1 and Q2 (1.4500 & 1.4400) did not incorporate a broad-based 25% tariff. The 2020 high (1.4668) and the 2016 high (1.4690) would likely be taken out quickly and a move into a 1.5000-1.6000 range (last seen in 2003) would come into play.”
