US
USD is down against all major currencies, global equity markets are trading lower, and gold is up. The broad USD decline is counter-intuitive in a risk off environment but suggests financial markets are losing confidence in US trade, fiscal and security policies.
Trade tensions heat up again. China and the US accused each other of violating their May 12 trade agreement. The US blamed China for restricting exports of rare earth minerals. In turn, China criticized the US of introducing fresh export controls on AI chip, limiting access to chip design software, and cancelling student visas for Chinese nationals.
Moreover, US President Donald Trump said on Friday that tariffs on imported steel and aluminum, would double to 50% effective June 4. Canada is by far the top supplier of steel and aluminum to the US. Still, Canada’s steel and aluminum sector is small and account for about 0.2% of total GDP. CAD is up versus USD but underperforming on the crosses.
The US economy remains on solid footing, but the impact of tariffs is muddying the waters. The Atlanta Fed GDPNow model estimates Q2 growth at 3.8% SAAR on May 30 vs. 2.2% on May 27 as the contribution from net exports rose from -0.64pts to 1.45pts. Meanwhile, PCE inflation cooled closer to the Fed’s 2% target in April. Headline PCE eased to 2.1% y/y (consensus: 2.2%) vs. 2.3% in March and core PCE matched consensus at 2.5% y/y vs. 2.7% in March.
Fed Governor Christopher Waller stressed overnight that “Assuming that the effective tariff rate settles close to my lower tariff scenario [10% average tariffs on goods], that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting "good news" rate cuts later this year.” Fed funds futures continue to imply over 80% odds that the next 25bps cut will be delivered at the September 17 meeting.
In our view, US protectionist trade policies have raised the risk the US economy enters a period of stagflation which can further undermine USD. Indeed, the rising ISM prices index point to a reacceleration in inflation pressures while the Conference Board Leading Economic Index fell for the fifth consecutive month in April, indicative of subdued growth prospects.
The US May manufacturing ISM is today’s highlight (10:00am New York). Headline is projected at 49.5 vs. 48.7 in April. The regional Fed ISM manufacturing prints suggest risk are skewed to the upside. Of note, the US S&P Global manufacturing PMI rose 2.1 points to a three-month high at 52.3 in May.
Fed Chair Jay Powell gives opening remarks today and is expected to stick to the wait-and-see policy script (1:00pm New York). There is no Q&A session. Both Dallas Fed President Lorie Logan (2026 voter) and Chicago Fed President Austan Goolsbee (voter) participate in a moderated Q&A (10:15am and 12:45pm New York, respectively).
CHINA
USD/CNH had a kneejerk rally to its 200-day moving average at 7.2263 amid a flare-up in US-China trade tensions. China economic activity remained soft in May. The composite PMI increased 0.2pts to 50.4, reflecting in part the US-China trade truce reached May 12. The manufacturing PMI matched consensus at 49.5 vs. 49.0 in April while the non-manufacturing PMI unexpectedly dipped 0.1pts to 50.3 (consensus: 50.5) vs. 50.4 in April. Bottom line: the recovery remains fragile, and we expect more stimulus measures in the coming weeks.
POLAND
PLN brushed-off the result of Poland’s presidential election. The nationalist Law & Justice party leader Karol Nawrocki won 50.9% of the votes against Warsaw Mayor Rafal Trzaskowski, a centrist and pro-European candidate aligned with Prime Minister Tusk’s Civic Platform.
While the presidency in Poland is largely ceremonial, Nawrocki’s win will extend the legislative paralysis and is a headwind for PLN. The president has veto power and Tusk’s government does not have three-fifths majority in the Sejm (lower house) to override a veto.
JAPAN
USD/JPY edged down nearly 1% to 142.80 on broad USD weakness. 10-year JGB yields are range-bound around 1.50% after peaking at 1.57% on May 22. The Bank of Japan (BOJ) published the minutes of the 22nd round of its “Bond Market Group” meetings held on May 20-21.
Markets participants views about the pace of tapering in BOJ JGB purchases were mixed. Some argued the BOJ should accelerate the pace of the reduction to increase the amount of JGBs in the secondary market. Others argued for the BOJ to decrease the reduction amount given the difficulty of identifying the optimal level of the Bank's JGB holdings. Finally, another group favored keeping the current pace of JGB reduction intact.
As a background, the BOJ is currently trimming its JGB purchases by about ¥400 billion per quarter and will conduct an interim assessment of the plan for the reduction of its purchase amount of JGBs at the June 2025 Monetary Policy Meeting (MPM). Following the recent turmoil in the JGB market, we expect the bank to maintain the current pace and underscore that it stands ready to make one-off purchases as needed to smooth market functioning.
