The dollar is modestly firmer as Powell testimony continues. DXY is trading higher near 98.077 after three straight down days as Powell and other Fed officials stress the current pause (see below). The euro is trading lower near $1.1605 after making a new cycle high near $1.1640 yesterday. Similarly, sterling is trading lower near $1.3605 after making a new cycle high near $1.3650 yesterday. The yen is underperforming on signs that the bar for the next BOJ hike remains high (see below), with USD/JPY trading higher near 145.70. While the dollar will see a modest haven bid from time to time given simmering Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold last week. Indeed, some Fed officials are pushing back against Powell already and others are likely to join them in the coming days and weeks. Market repricing of Fed easing along with fading risk off impulses should open up dollar downside again.
AMERICAS
Powell testified before the House Committee on Financial Services yesterday. He maintained a hawkish tone that was similar to his recent post-decision press conference. Powell noted that "If you just look in the rearview mirror and look at the existing data that we've seen, you could make a good argument that it would call for us to be at a neutral level, which would be a couple of cuts or maybe more." However, he stressed that “At this time, all forecasters are expecting pretty soon that some significant inflation will show up from tariffs. We can’t just ignore that.” Powell added that “We'll make smarter and better decisions if we just wait a couple of months or however long it takes to get a sense of really what is going to be the pass-through of inflation.” He appears before the Senate Banking Committee today.
Other Fed officials lined up behind Powell. Hammack said “It may well be the case that policy remains on hold for quite some time before the committee initiates very modest cuts to return policy to a neutral setting.” Williams said “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals.” Collins said “I don’t see an urgency to adjust rates…We do not have that sustained price stability that I’m looking for.” Barr said “Monetary policy is well positioned to allow us to wait and see how economic conditions unfold.” Kashkari said “it isn’t obvious that we’ve seen the full effects of the tariffs yet so we’ve been taking our time to try to get a sense of what’s really going on before we made any dramatic changes in our policy outlook.” Schmid said “With all this uncertainty, the current posture of monetary policy, which has been characterized as 'wait-and-see,' is appropriate.” Goolsbee speaks today.
These comments were meant to offset the more dovish tone from Waller and Bowman. The key takeaway remains that the Fed is not inclined to cut rates until it can judge the degree of tariff pass-through, something that hasn’t been felt yet. The market is pricing in 20% odds of a July cut but becomes fully priced in for September. More importantly, the swaps market is now pricing in nearly 100 bp of total easing over the next 12 months vs. 75 bp at the start of this week.
Conference Board consumer confidence unexpectedly weakened. Headline fell to 93.0 vs. 99.8 expected and a revised 98.4 (was 98.0) in May. This was the lowest reading since the cycle low of 85.7 in April. Present situation fell to 129.1 vs. a revised 135.5 (was 135.9) in May, while expectations fell to 69.0 vs. a revised 73.6 (was 72.8) in May. That said, the sentiment readings no longer appear to be a reliable indicator of future spending behavior. University of Michigan reports final June consumer sentiment Friday. Headline is expected to fall two ticks from the preliminary to 60.3.
The labor market is showing further signs of cracking. The labor index (jobs plentiful minus jobs hard to get) dropped further in June to 11.1 (lowest level since March 2021) vs. 12.7 in May, indicative of weakening labor market conditions. Weekly claims data tomorrow should also show ongoing weakness that warns of a possible sub-100k NFP reading in June. Current Bloomberg consensus is 122k vs. 139k actual in May, while its whisper number stands at 111k.
Canada reported May CPI data. Headline remained steady as expected at 1.7% y/y, while core median and core trim both fell to 3.0% y/y, as expected. The Bank of Canada is concerned that “underlying inflation could be firmer than we thought.” With core CPI at 3.0% y/y, a rate cut at the next July 30 meeting is not a done deal. Indeed the swaps market is pricing in 33% odds of a 25 bp cut then. Looking ahead, the swaps market is now pricing in 25-50 bp of total easing over the next 12 months that would see the policy rate bottom between 2.25-2.50%.
EUROPE/MIDDLE EAST/AFRICA
BOE officials are tilting more dovish. Governor Bailey said “We are starting to see softening of the labor market and that’s the message I get when I go around the country talking to firms.” Deputy Governor Ramsden said “I assessed that the signals from the labor market provided a sufficiently strong case for a reduction in Bank Rate to 4%, to guard against the increasing risk that, in the medium term, inflation would settle at below our 2% target.” MPC member Greene said “There is a risk that elevated inflation of roughly 3.5% the rest of this year will feed through into inflation expectations, and therefore wage and price setting behavior,” but added that “a careful and gradual approach to removing monetary policy restrictiveness continues to be warranted.” Deputy Governor Lombardelli speaks today. Recall that Dhingra, Ramsden, and Taylor were the three dissents in favor of a 25 bp cut this month. With recent data softening, the market sees 85% odds of a cut at the next meeting August 7. Looking ahead, the swaps market still sees 75 bp of total easing over the next 12 months.
Riksbank minutes were released. At that meeting, the Riksbank cut rates 25 bp to 2.0%, as expected. The minutes show that the decision was unanimous. However, Governor Thedéen said that “I want to emphasize that this signal should not be over-interpreted, given the uncertain situation.” That said, the policy statement was dovish as it noted that “The forecast for the policy rate entails some probability of another cut this year.” In its updated rate path forecasts, the Riksbank sees the policy rate at 1.92% by Q4 2025 before bottoming at 1.88% by Q1 2026. This lines up for the most part with the swaps market, which is pricing in 25 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.
Czech National Bank is expected to keep rates steady at 3.5%. At the last meeting May 7, the central bank cut rates 25 bp to 3.5%. However, it was a hawkish cut as Governor Michl said “We don’t have agreement for now whether this was the last cut or not. What we do agree on is that the room for lowering rates further is limited, and that further cuts are preconditioned by a decline in inflationary risks in the domestic economy.” More recently Michl said “The base repo rate currently is at 3.5%, and I expect it will remain at this level for some time.” The swaps market got the message and has trimmed rate cut bets over the next 12 months from 50 bp to none now.
ASIA
Bank of Japan summary of opinions for last week’s meeting suggests that the bar for hiking rates is high. Recall that the bank kept rates steady but announced plans to slow the pace of its tapering. One member noted that “The bank should, at this point, maintain accommodative financial conditions with the current interest rate level and thereby firmly support the economy.” A similar view was shared by at least two other members, with one saying “Even though prices have been somewhat higher than expected, it is appropriate for the bank to maintain its current stance regarding the conduct of monetary policy, given the downside risks to economic activity stemming from US tariff policy and the situation in the Middle East.” The swaps market still sees only 25 bp of tightening over the next 12 months and so the cautious normalization cycle is an ongoing headwind for JPY.
BOJ board member Tamura toned down his hawkish bias. Tamura spoke and said the chances of a rate hike aren’t so high while trade talks between Japan and the US are still underway. However, he stressed that “When the likelihood of achieving the price stability target increases, or when upside risks to prices grow, I believe that the bank may face a situation where it should act decisively, despite heightened uncertainties.” Tamura is the most hawkish board member as he was the only one to vote in favor of a rate hike in December 2024.
Australia May CPI data ran cool. Headline came in two ticks lower than expected at 2.1% y/y vs. 2.4% in April, while trimmed mean fell four ticks to 2.4% y/y in April. Headline was the lowest since October while trimmed mean was the lowest since November 2021, with both nearing the bottom of the 2-3% target range. Softening inflationary pressures argues for more RBA rate cuts. The market has nearly priced in a 25 bp cut to 3.60% at the next meeting July 8 and nearly 100 bp of easing over the next 12 months.
Bank of Thailand kept rates steady at 1.75%, as expected. It said the pause was due to “high uncertainty and limited policy space” but stressed that it stands ready to adjust policy in the future as needed. The bank raised its 2025 growth forecast slightly to 2.3% on a more constructive external backdrop. The BOT assumed an 18% tariff rate will be applied to Thailand vs. the 36% reciprocal rate announce in April as well as 10% for other countries. This seems way too optimistic to us. Assistant Governor Sakkapop “We have limited ammunition so timing is important. We need to see when will be the most effective timing to cut the rate.” The swaps market is pricing in 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.25%, with some odds seen of another cut that would the rate down to 1.0%.
