Risk sentiment was initially buoyed overnight and through Europe after the US announced that smartphones and electronics were exempt from China’s additional tariffs, but Trump clarified they are still subject to the 20% tariff rate imposed on China due to the inflows of fentanyl to the US. Equity futures hit peaks around the opening bell, but a soft open saw the upside pare by the time Europe left for the day. Further on tariffs, we are still on the look out for any semiconductor related update, while Trump said Monday they will do tariffs on imported pharmaceuticals, they do not make their own drugs, and pharmaceutical tariffs in the not too distant future. The upside returned in the US afternoon, perhaps buoyed by dovish commentary from Fed’s Governor Waller, which also gave a helping hand to T-Notes as they settled at highs. The Fed Governor noted that under the current tariff rate (effective tariff rate of 25%), he would support cutting rates sooner, and to a greater extent than previously thought. Elsewhere, the data highlight was the New York Fed SCE, which saw inflation expectations rise in the short-term, unchanged in the medium term, and fall in the long term. In FX, The Dollar was choppy, with the Dollar Index trading between 99.27-101.16, but heads to European Trading sub-100. Cyclical currencies outperformed (ex-CAD) while JPY saw marginal gains. The Swiss Franc saw some notable weakness during trade but with little headline catalyst, and the moves have since pared. In commodities, crude ultimately settled flat but off earlier lows while gold was down, but silver was up. Attention this week remains on ongoing trade updates with EU’s Sefcovic in Washington for trade talks. Elsewhere, US retail sales and US earnings will be in focus. The March New York Fed Survey of Consumer Expectations saw the one-year inflation expectations rise, three-year remain unchanged, with the 5-year forecasts falling. The report also found that unemployment, job loss, and earnings growth expectations deteriorated, while household income growth expectations declined. Median one-year-ahead earnings growth expectations fell by 0.2% to 2.8% in March, equaling its 12-month trailing average. The mean probability that the US unemployment rate will be higher one year from now jumped 4.6% to 44.0%, the highest reading since April 2020. The survey found the mean perceived probability of losing one’s job in the next year rose 1.6% to 15.7%, while the probability of finding a job if the current job was lost fell by 0.1% to 51.1%. Households were also more pessimistic about their year-ahead financial situations and access to credit. On the stock market, stock price expectations declined and reached the lowest level since June 2022. Fed Governor Waller suggested that the new tariff policy represents one of the largest shocks to the US economy in decades. He believes that higher inflation from tariffs will be temporary, but policy is highly uncertain and calls on the Fed to remain flexible. He acknowledged how partial tariff suspension has widened the range of possible outcomes and made the timing less certain. He notes inflation expectations have not become unanchored, and expects inflation to return to a more moderate level in 2026. Waller said policy is meaningfully restricting economic activity (Powell and others have used the term modestly restrictive), and hopes underlying inflation will continue to moderate. Waller added that in Q1, the economy was growing modestly, the labour market was solid, but inflation was too high and making slow progress. Waller also gave his PCE forecasts for March, Y/Y headline expected at 2.3%, with Core at 2.7%. The Fed Governor also laid out some economic projections under different tariff scenarios. Under a large tariff scenario, where a 25% average tariff rate stays for some time, inflation could peak near 5%, while the drag on output and employment could be longer-lasting, with unemployment climbing to 5%. Under this scenario, Waller would favour cutting the policy rate sooner than previously thought. However, under a scenario where tariffs drop down to 10%, inflation could peak at 3%, would see limited effects on economic activity and he would support a limited monetary policy response. Under a smaller-tariff scenario, the Fed could be more patient and rate cuts could take place in the latter half of the year. In wake of the speech, Wall Street Jornal’s Timiraoss highlighted Waller continuing to be more dovish than his colleagues. Elsewhere, Oil ended Monday with a 0.2% gain while Gold traded sideways before closing 0.8% lower.
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