Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Can fresh JPY surge hold through Wednesday, Trump’s Liberation Day?
John J. Hardy
Global Head of Macro Strategy
Summary: A plunge in global bond yields has driven a fresh surge in the Japanese yen as Japan closes the books on its financial year and ahead of Wednesday’s fresh barrage of Trump tariffs.
Friday saw a vicious resumption of the risk-off move in equity markets, timing-wise associated with the release of the PCE inflation data, which saw year-on-year core inflation rising at 2.8%, slightly higher than the 2.7% expected, though this measure of inflation has been rangebound between 2.6 and 2.9% since last April. It is more likely that equity markets are moving south on a secular unwinding of the “US exceptionalism” trade and concerns that the ongoing Trump tariff blitz – one that changes seemingly by the hour, will send the US economy into a recession. It is a bit ironic that US treasury yields dropped sharply all along the yield curve in the wake of the hot inflation print.
Then we get the news late yesterday from the Wall Street Journal (paywall) that Trump may prefer to go with his original broader and higher tariff strategy after all. Since the election, fears of a massive tariff blitz have occasionally been allayed, particularly last week, by hints that Trump's team might adopt a more nuanced, case-by-case approach to imposing reciprocal tariffs. The only thing the market wants to do with all of this incoming chaos is to seek safe havens, chiefly in gold of late, but even US treasuries are finding safe haven appeal, as is the Japanese yen, which continues to respond to shifts in US yields. Other currencies are a mixed bag, with all pro-cyclical currencies on the defensive since Friday (even the mighty SEK of late), while the US dollar is not showing consistent correlation with risk sentiment. As we discuss below, the tariffs may be mostly important in terms of how they impact the outlook for US economy as well as driving this global portfolio re-allocation theme that reduces exposure to the US (and hence the USD), rather than whether they are driving any challenge to the access to US dollars (the traditional angle for USD outperformance in times of market stress).
Chart: USDJPY
USDJPY has backed off sharply from the 151.21 high from Friday and traded well south of 149.00 on the lows this morning before a sharp rebound intraday. The pair seems to trade passively with the direction in US treasury yields, so we may need for a US recession to continue to crystallize in coming months to work down to 140.00 and beyond. To work lower than that in USDJPY, we may need to get a sense that Trump is willing to ease up on the tariff front on countries who are willing to accommodate the new US stance on trade without retaliation, including committing to inbound investment into the US and perhaps a commitment to strengthen the currency. Since last Thursday, the JPY is underperforming relative to the move in US long treasury yields – let’s get over the end-of-financial-year in Japan today to see if this is something we need to investigate further.
The week ahead
Australia’s RBA up tonight
A minority of observers are looking for the Reserve Bank to cut rates again tonight. The bank would probably do well to cut again now rather than waiting until May to cut, as most expect. Will RBA focus on the March Melbourne inflation gauge rebound or find support for a cut from the steady drop in core inflation through the official Feb “trimmed mean” data series and perhaps at the sense of impending doom from global market sentiment? No idea, but a cut wouldn’t be a huge surprise. AUD has been suffering from weak risk sentiment, not buoyed by Chinese stimulus hopes this time around because these are focused on encouraging consumption, not the fixed asset stimulus that drove so much demand for Australian coking coal, iron ore, etc.
Tuesday: Eurozone Flash March CPI
The core, YoY release expected to drop to a new cycle low of 2.5% after 2.6% in February.
Wednesday: Trump Tariff announcements, or “Liberation Day”.
The chief question for Trump’s touted Liberation Day may be more in how much the market has front-run whatever bad news is set to be delivered and whether this proves a “sell the rumor, buy the fact” moment or if it even serves as a major event risk at all. After all, the tariff chaos has been rolling along nearly every day since well before Trump’s inauguration and the impacts of tariffs will take a long time to accumulate, as trading partners also roll out their responses to US measures. And eventually, the US Congress could challenge some of the tariffs as discussed in the WSJ article noted above. In short, market focus could be more intense on the incoming data and where we are with the risk of a recession more than tariff headlines in coming weeks. One critical risk from here and over the next few months is the risk of a post tariff “cliff” if it proves that many have been front-running tariffs with large inventory builds ahead of their implementation.
US economic data through Friday’s jobs report
The usual first week of the month data is up this week, starting with the JOLTS survey and ISM Manufacturing survey on Tuesday. The JOLTS survey often gets a reaction, though the data quality on the initial release is considered very poor due to the combination of a small sample size and falling response rates (31% in 2023 vs. 64% in 2017. On the ISM Manufacturing, it is far too early in the game to look for tariffs to boost the US manufacturing sector, and this survey gets little play, but did just crawl above the 50 level the last two months after an incredible run of 26 months below 50 (pandemic hangover in part). The ISM Services survey could get more play on Thursday if it surprises in either direction. But the most important data points will be the labor market data this week, starting with Wednesday’s ADP employment change (especially if it is low again after the +77k in Feb.) and followed by Thursday’s weekly claims numbers if these surprise, and finally the usual monthly jobs report for March on Friday.
Friday: Canada’s March Jobs Report
Too early now, but watching for signs of disruption to the Canadian economy from Trump’s tariffs.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The JPY has jumped to life again on the plunge in global bond yields – though at this point it is merely bouncing back from weakness, not yet trending stronger. Elsewhere, gold really sticks out again after the brutal run higher in the last few sessions, while SEK and NOK maintain incredibly strong readings, even if the momentum has to come off at some point soon.
Table: NEW FX Board Trend Scoreboard for individual pairs. AUDUSD has flipped back to negative as of yesterday’s close, and USDCNH has flipped to positive (although most likely with a very low ceiling at 7.375 for now). AUDNZD is in a pivotal area around 1.1000 after the downtrend of late has failed to become more entrenched. The CADJPY reading just managed to flip to positive late last week and could tilt back into negative on today’s close already.
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