The dollar is retreating as optimism surrounding the weekend’s trade deal continues to diminish and US consumers show signs of exhaustion, leaving investors to contemplate longer-term risks to the American economy. Treasury yields are moving higher, equity indices are indicating a modest softening in today’s session, and most majors – excluding the Canadian and Australian dollars – are up against the greenback. Oil prices are trading lower after President Trump said the US is close to reaching a deal with Tehran that would lift sanctions on its energy exports in exchange for a commitment to halt Iran’s nuclear weapons development.

American consumers turned more cautious in April, suggesting that a dramatic deterioration in confidence levels is beginning to translate into weaker spending. Data published by the Census Bureau this morning showed headline retail sales rising just 0.1 percent last month, down from a revised 1.7 percent in March as tariff front-running effects lost steam . “Control group” receipts – which exclude sales by auto dealers, building materials stores, gas stations, office supply distributors, and other more volatile distribution channels – fell -0.2 percent on the month. Economists expect shopping volumes to fall further in the months ahead, given that consumer sentiment is plumbing recession-like lows, and year-ahead inflation expectations are at the highest levels since 1981.

Wholesale prices fell more than expected in April, affirming market expectations for a lagged reaction to the Trump administration’s tariff increases. According to the Bureau of Labor Statistics, the producer price index for final demand fell -0.5 percent from a month earlier, but this was primarily driven by a violent -6.9-percent drop in portfolio management fees, likely caused by the selloff in equity markets during the month. Core goods prices climbed 0.08 percent, and margins came under sustained pressure across both the tangible-product and services areas of the economy.

Federal Reserve Chair Jerome Powell at a research conference this morning avoided discussing the economic outlook and monetary policy settings directly, instead focussing his comments on the central bank’s framework review.

Data released earlier in the session showed the British economy accelerating in the first quarter, just before US tariffs hit. Gross domestic product expanded 0.7 percent in the three months ended in March, mostly powered by a bigger-than-expected jump in services-sector activity. Net trade – potentially boosted by tariff front-running – also delivered a positive contribution. But this strength isn’t expected to last: household consumption remains weak, and elevated levels of trade-related uncertainty are likely to take a toll on business investment in the months ahead. Market participants still see the Bank of England delivering at least two rate cuts in the months ahead, and the pound is struggling to build on its early-year gains.

In theory, this afternoon’s rate decision from Mexico’s central bank should be a non-event: policymakers have clearly guided investors to expect a half-point cut, and the move has been priced in by fixed income and foreign exchange markets. We think the longer-term risks to the currency are biased to the downside, but officials could trigger a temporary rally in the peso by adopting a less-dovish tone in their communications – perhaps by highlighting diminished trade risks and taking a more cautious view on future rate cuts.

From a broader perspective, currency markets are trading as if an acute threat to the US economy and dollar-denominated assets has faded, only to be replaced with a chronic one. After more than 50 changes in tariffs thus far this year, it appears that a series of adverse market reactions has led to a more careful tone from the Trump administration, but the fact remains: import taxes and uncertainty levels remain at historic highs, setting the stage for weaker economic performance in the months and years ahead. Volatility assumptions are ratcheting lower, and real-money investors aren’t taking outright bearish views on US growth or the dollar, but they are shifting asset allocations toward global markets in anticipation of a slow erosion in the economy’s exceptional status relative to its major counterparts. Risk reversals* – which measure the cost of insuring against a drop in the greenback relative to other major currencies – have risen, with traders hedging against a negatively-skewed distribution of outcomes for the dollar in the year ahead, while also taking a more positive view on the euro.

*This chart inspired by a post from Bespoke Investment’s George Pearkes here

**When most patriotic Canadians consume the traditional “flat” (a case containing 24 beers) in Queen Victoria’s honour.