Daily Points

ON DECK FOR FRIDAY, APRIL 25

KEY POINTS:

• Mild risk-off sentiment amid light developments
• Canadian retail sales are not getting a helping hand from auto sales
• Waller Vs. Powell: Fed expectations are being set up to be smacked down again
• US auto sales soared again, lean inventories to magnify tariff hit on prices
• Hot Tokyo core CPI offset by Ueda’s patience
• UK consumers partied before tariffs hit
• Russia’s central bank holds
• Mexico to update stale GDP proxy

Mixed sentiment includes about a slight drop in US and Canadian equity futures, and gains of ¼% to 1% across European cash markets as they catch up to yesterday’s US rally. Sovereign bond yields are little changed with a slight cheapening bias on average across EGBs and very mild outperformance by US Ts, Canadian government bonds and gilts. The dollar is broadly stronger.

Fresh catalysts are few and far between. US tech earnings traded off a solid beat from Alphabet and weak results from Intel. China tariff headlines are mixed as Trump claims there are talks, China claims no, and the usual unverifiable ‘people familiar with the matter’ are claiming that China may exempt a few categories from tariffs merely out of necessity, such as some industrial chemicals and medical equipment. Trump’s interview with Time is making headlines and contains the usual mixture of nonsense, but he did repeat that he would veto any budget reconciliation bill that cut social security and Medicare which makes achieving agreement with the GOP’s fiscal hawks challenging.

Overnight releases were of little consequence as Ueda managed expectations for next week’s BoJ meeting. Light data is ahead into the N.A. session.

WALLER VS. POWELL

As far as Fed expectations are concerned, Governor Waller’s comments yesterday added a few more basis points to this year’s cumulative Fed cut expectations but it’s still between 75–100 bps which still feels to rich to me. In my opinion, markets are merely setting themselves up to be slapped back down by Powell’s same patience message on May 7^th as the Committee awaits data and developments to inform them over time about which of their dual mandate goals deteriorates the most and hence what the appropriate policy response should be.

Waller said he would support cuts if jobs stumble but the reason he says that is because he views tariffs as merely a one-off price level adjustment and not inflation. That’s unclear. The role of expectations, possible behavioural changes, and supply chain disruptions including looming product shortages also need to be evaluated. Which part of the dual mandate deteriorates faster remains an empirical issue to be settled over time.

UK CONSUMERS PARTIED BEFORE TARIFFS HIT

UK retail sales volumes handily beat expectations with a gain of 0.4% m/m in March versus the -0.4% consensus. Sales ex-gasoline also beat (+0.5%, -0.5% consensus). Clothing and footwear were the strongest categories and food sales were the weakest. Sterling climbed in the aftermath, but the overall market response was limited given forward-looking risks.

HOT TOKYO CPI OFFSET BY UEDA’S PATIENCE

Tokyo CPI was hotter than expected at 3.5% y/y (3.3% consensus) and 3.1% excluding food and energy (2.8% consensus). The month-over-month gain in CPI ex-f&e was 4.9% SAAR again for the hottest back-to-back readings in two years (chart 1).

The reason the hot readings were mostly ignored by markets was that BoJ Governor Ueda’s comments just before signalled patience ahead of next week’s meeting. He said “We want to closely monitor data related to the impacts of tariff measures and their mechanism in particular. We will carefully watch how the likelihood of realizing our outlook changes without preconception and make appropriate policy decisions.” That seems sensible enough. Nothing was expected for next week’s meeting anyway but it’s a full forecast meeting.

CANADA TO REFRESH RETAIL SALES

Statcan updates retail sales figures for February and March this morning (8:30amET). February had been previously guided to be a drop of about –½% m/m and we’ll see how they revise it along with important details like volumes and drivers. The first estimate for March also arrives. Unlike the US, there has been no evidence of tariff front-running in Canadian auto sales of late, or if there was such an effect, then it happened much earlier than in the US (chart 2). There was a surge in seasonally adjusted sales over October to January, but then Canadian sales fell back in February and were roughly flat in March. April sales are pending, so we’ll see, but at least so far it’s not clear there is recent tariff front-running in Canada.

Going forward, we should expect significant tariff-driven substitution effects within Canadian retail sales. For example, Canada doesn’t need US-made vehicles, as Canadians can buy ones made here or from Europe and Asia that often produce nicer vehicles anyway.

MINOR OTHER DEVELOPMENTS

We’ll also get Mexico’s monthly GDP proxy (8amET) that is expected to post solid growth for…..February! #stale. Russia’s central bank held its policy rate unchanged at 21% as expected. The US should be quiet with just revisions to the April UofM sentiment gauge (10amET).

STRONG US AUTO SALES, LEAN INVENTORIES, AND PRICE EFFECTS

US auto sales were stomping strong last month. Industry guidance pointed to a tally of 17.9 million at a seasonally adjusted and annualized rate. That’s a touch higher than the 17.8 million in March that itself was the highest since early 2021 and marked a sharp acceleration from 16 million in February and 15.6 million in January. No doubt this is about tariff front-running.

The April tally probably faces further upside by the time we get Wards’ numbers next week because the industry guidance is based on the first 17 selling days of the month. April this year has 26 selling days including the recent long weekend. I’ve estimated sales will land at about 18.5 million SAAR (chart 3).

There should be two effects when the tariff wall hits. One is the price-crushing drop as tariffs add thousands of dollars to vehicle prices. Two is the pulled forward demand effect. I wouldn’t be surprised if we're plumbing pandemic style depths over the summer/Fall.

Industry guidance on prices along with our seasonal adjustments suggest that overall vehicle prices should contribute less than a tenth to m/m SA CPI in April. A weighted SA gain in new vehicle prices is partly offset by a weighted SA drop in used vehicle prices.

What is also likely to magnify price increases is the fact that inventories remain very low (chart 4). The flip side to lean inventories, however, is that it mitigates at least some of the production disruption from tariffs and their effects on the economy. Once tariffs bite into new supply, I expect both new and used vehicle prices to rise sharply with new prices driven by tariff pass through and used prices driven by the substitution effect.