The dollar is under pressure despite risk off impulses. DXY is trading lower for the second straight day near 98 and is testing the April cycle low just below the figure. Weakness is being driven by increased tariff concerns as well as rising Middle East tensions (see below). Clean break below 98 sets up a test of the January 2022 low near 94.629. The euro is trading at a new cycle high near $1.1590 and is on track to test the October 2021 high near $1.1690. Elsewhere, sterling is trading higher near $1.3585 despite soft real sector data. It should eventually test and break above last week’s cycle high near $1.3615, which sets up a test of the January 2022 high near $1.3690. USD/JPY is trading lower near 143.50 despite the soft Q2 BSI report. The 140-145 range continues to hold but the pair is likely to test the downside if risk off impulses continue. As we have seen in the past couple of risk off episodes, USD has not been a beneficiary of haven flows and is likely to be one facet of its loss of international standing.
AMERICAS
Tariff noise has picked up again. With regards to reciprocal tariffs, President Trump said that “We’re going to be sending letters out in about a week and a half, two weeks, to countries, telling them what the deal is.” He added that “At a certain point, we’re just going to send letters out. And I think you understand that, saying this is the deal, you can take it or leave it.” This was reported weeks ago and things can change in the blink of an eye. However, it is a stark reminder that U.S. trade policy remains at the whims of President Trump. We believe this unpredictability is feeding into the growing lack of confidence in US policymaking.
May CPI data were mixed. Headline came in as expected at 2.4% y/y vs. 2.3% in April, while core came in a tick lower than expected at 2.8% y/y and was steady vs. April. However, super core picked up two ticks to 2.9% y/y. The Cleveland Fed’s Nowcast model forecasts June headline and core at 2.4% and 2.8%, respectively. Looking ahead, that model forecasts June headline and core at 2.6% and 3.0%, respectively. Fed easing expectations have moved up a bit after the data. The market still sees no chance of a cut next week, but odds of a cut in July have risen to nearly 20% and nearly 90% in September. Still, the next cut is not fully priced in until the October meeting. The swaps market is still pricing in 75 bp of total easing over the next 12 months.
PPI will be reported today. Headline is expected at 2.6% y/y vs. 2.4% in April while core is expected to remain steady at 3.1% y/y. Keep an eye on PPI services ex-trade, transportation, and warehousing as it feeds into the PCE reading. In April, this measure fell one full percentage point to 3.3% y/y, the lowest since March 2023.
This week’s heavy UST supply concludes with today’s $22 bln 30-year bond auction. At the last auction, the bid/cover was 2.31 and indirect bidders took 58.9%. Yesterday’s $39 bln auction of 10-year notes saw slightly weaker demand. The bid/cover was 2.52 vs. 2.60 at the last auction in May, while indirect bidders took 70.6% vs. 71.2% in May.
Q1 household net worth will also be reported. Household balance sheets remain strong and are supportive of consumer spending activity. Net worth increased by $164 bln in Q4 after rising $4.8 trln in Q3. In Q4, a decline in the value of holdings of debt securities and real estate was offset by an increase in the value of corporate equities holdings and other assets. The ratio of net worth to disposable personal income dipped to 772% of GDP in Q4 from 781% of GDP in Q3, and remains just under its all-time high of 833% of GDP in Q1 2022.
Peru central bank is expected to keep rates steady at 4.5%. At the last meeting May 8, the bank delivered a dovish surprise and cut rates 25 bp to 4.5% vs. no change expected. It said expects both headline and core inflation to remain near 2% in the coming months, which would be right at the middle of the 1-3% target band. The bank noted that rates are approaching neutral levels and warned of downside risks related to the global trade wars. As such, we see slight risks of a dovish surprise this week. Of note, Bloomberg consensus sees steady rates through year-end.
EUROPE/MIDDLE EAST/AFRICA
Crude oil prices remain high after Iran threatened to strike US bases in the region if talks collapse. Brent oil prices are down modestly today after surging yesterday by nearly 7%. A sixth round of talks is scheduled for Sunday in Oman. In the meantime, the US ordered some staff to depart its embassy in Baghdad and authorized families of military service members to leave the region. CHF, JPY and gold are good hedges in case of escalating tensions between the US and Iran. As we have seen in the past couple of risk off episodes, USD has not been a beneficiary of haven flows and is likely to be one facet of its loss of international standing.
ECB officials continue to set up a pause. GC member Simkus said that “we’ve arrived at the neutral level - it’s now important to maintain the freedom of potential decision, not to commit to one direction or another.” Referring to US tariffs, Simkus added that “The economic situation is very unclear - no one knows what the US decisions will be on July 9.” Given this forward guidance, the market is pricing in only around 10% odds of a cut next month. In addition, the swaps market is now pricing in another 25 bp of easing over the next 12 months vs. 50 bp seen at the start of this week. Escriva, Knot, Panetta, Schnabel (twice), Patsalides, and Guindos also speak today.
U.K. reported soft April real sector data. Real GDP came in two ticks lower than expected at -0.3% m/m vs. 0.2% in March, reflecting the negative impact of tariffs on activity. Indeed, the composite PMI dropped below the 50 boom/bust level in April to the lowest level since September 2023 and warns of further weakness ahead. Elsewhere, IP came in a tick lower than expected at -0.6% m/m vs. -0.7% in March, services index came in three ticks lower than expected at -0.4% m/m vs. 0.4% in March. Construction output was the lone bright spot and came in at 0.9% m/m vs. 0.2% expected and 0.5% in March. The decline in the services sector is worrisome as it accounts for nearly 80% of GDP. The Bank of England may no longer have the luxury of pausing its easing next week, especially with the labor market weakening. The swaps market is pricing in less than 10% odds of a 25bps cut at its next meeting June 19. Looking ahead, the swaps market is still pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom at 3.50%.
ASIA
Japan Q2 BSI survey was soft. The Ministry of Finance’s Business Sentiment Index (BSI) for large enterprises across all industries fell to -1.9 vs. 2.0. This was the first negative reading since Q1 2023. Elsewhere, the large manufacturing index fell to -4.8 vs. -2.4 in Q1 and was the weakest reading since Q1 2024. We note that this index is not a very reliable bellwether indicator of real GDP, as the Tankan report due out June 30 is better. However, the drop in the BSI as well as the drop in the composite PMI to 50.2 in May warns of a slowing economy. As a result, we expect Japan equities to continue underperforming despite expectations of a relatively mild tightening cycle (25 bp over the next 12 months).
