US deflators are expected little changed, but holding well above the Fed target

Market

The US Congressional Budget Office yesterday published its projections for the US federal budget deficit and debt for the period 2025‐2055. Both are expected to rise substantially further under the assumption that current laws will remain unchanged. The latter of course complicates investors’ assessment on the exact meaning of the report as it for example considers the Trump tax cuts to expire under current law. A the same time, the long term impact of current spending cuts is difficult to assess. That said, the CBO expects the Budget deficit to rise from an expected 6.2% in 2025 to 7.3% in 2055. The rise in the deficit, amongst others, is for an important part driven by higher interest rate payments (expected to rise from 3.2% of GDP to 5.4%). The debt is seen rising from 100% of GDP this year to a new post‐WWII record of 107% in 2029 to reach 156% of GDP in 2055. Aside from higher interest rate payments, a slower (potential) GDP growth (1.7% compared to an average of 2.4% over the previous 30 years) further complicates debt sustainability. Lower population growth in this respect is an important factor behind slower GDP growth. The outcome was no big surprise and the market reaction was very limited. Even so, the topic of debt sustainability will remain high on the political and market agenda as the Trump administration is taking sweeping steps that are at risk to further raise the deficits and in any case limit the visibility/raise the uncertainty on the US deficit/debt trajectory going forward. US yields in technical trading yesterday changed between ‐2.7 bps and +1.9 bps. Fed’s Collins indicated that tariffs inevitably add to inflation. Fed’s Barkin focused on the negative impact of instability for demand. In Europe/Germany the bull steepening continues with German yields again easing between 5.0 bps (2‐y) and 0.3 bps (30‐y). On equity markets, the US announcing 25% tariffs on auto imports didn’t help to restore investor confidence ahead of next week’s ‘tariffs Liberation Day’. Evens so, declines on US (S&P 500 ‐0.33%) and European equity markets (EuroStoxx 50 ‐0.57%) remained orderly. The dollar ceded modest ground (DXY 104.33 from 104.62). EUR/USD rebounded to close near 1.08, not that bad given the region’s exposure to (auto)tariffs.

Today’s calendar is well filled with first national EMU March inflation data (Spain, France, Belgium), ECB inflation expectations and EC economic confidence. In the US the February PCE deflators are worth looking at. Soft EMU inflation data might reinforce the case for the ECB to ‘frontload’ its next rate cut to April. US deflators are expected little changed, but holding well above the Fed target (headline 2.5%, core 2.7%). Even so, data probably will have to significantly deviate from consensus for markets to engage in lasting move, with investors taking a cautious approach ahead of next week’s US tariffs announcement.

News and views

Is its quarterly Monetary Policy report released yesterday, the central bank of Brazil (BdB) downwardly revised its GDP growth projection for 2025 from 2.1% to 1.9%, with a larger reduction in expectations for the more cyclical components. On inflation, which was already at a high level, the Bank took notice that it has risen again from 4.87% on November to 5.06% in February, 0.33pp above the December scenario and said that deanchoring risk of expectations has increased. March inflation published yesterday even printed at 5.26%. The BdB now projects that inflation remains above the upper limit of the tolerance interval (3.0% +/‐ 1.5%) throughout 2025, starting to fall from 2025Q4, but still staying above target. In the relevant monetary policy horizon, considered to be 2026Q3, the projected inflation still stands at 3.9%. The Bank last week raised its policy rate by 100 bps to 14.25%, and indicated a further adjustment, albeit at of a lower magnitude at its next meeting.

Inflation in Tokyo, often a reliable guide for where national Japanese price pressures are headed to, easily topped analyst forecasts. Prices in March rose 2.9%, accelerating from 2.8% in February and to be compared with a 2.7% forecast. The gauge excluding fresh food (favoured by the central bank) unexpectedly quickened to 2.4%, as did the narrowest indicator (ex. fresh food and energy), to 2.2%. Services prices rose by 0.8%, the fastest pace since December. It was up from 0.6% in February in a sign of building consumer momentum thanks to strong wage increases. In theory the numbers today add to a case for the Bank of Japan to hike policy rates further from the current 0.5%, potentially already at the May 1 meeting. However, comments from officials recently turned more balanced amid a darkening outlook for the global economy that’s posing risks for Japan’s as well. Money markets currently price the next hike for September but we believe the BoJ will act sooner (June or July at the latest). The Japanese yen appreciates marginally this morning. USD/JPY eases towards 150.77.

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