The dollar was mostly firmer against the majors last week.  AUD, SEK, and CHF outperformed while JPY, GBP, and NZD underperformed.  With little data last week, dollar strength carried over from the stronger than expected jobs report.  This week brings major data that are likely to underscore rising stagflation risks.  On top of the data, expect more trade noise and threats to Fed independence, all of which make for a toxic brew for the greenback.

AMERICAS

The trade threats are growing. President Trump declared 30% tariffs on the EU and Mexico just a day after he put 35% tariffs on Canada. All will go into effect August 1 and so there is still room for a deal of some sort. That said, why would any country enter into a trade deal with the US after seeing how Mexico and Canada have been treated a few years after signing the USMCA? All three of these allies have been negotiating in good faith for months now and so we fail to see how these threats are helping matters.

The attacks on the Fed are intensifying. However, it has taken on a new dimension as administration officials are openly criticizing Powell for the renovation of the Fed’s headquarters in DC. Some are speculating that these officials are building a case for firing Powell “for cause” but we are hard-pressed to justify such a drastic move. Indeed, we felt that the recent Supreme Court decision that specifically noted protections for Powell would have ended any debate in this administration. Any attempts to remove him now would not be taken well by the markets, to state the obvious.

At some point, markets will react to what we see as an ongoing erosion in US policy credibility. That would first be manifested in the dollar, as the FX market is typically the quickest to react. The risk is that a weaker dollar then starts to impact other US asset markets, as investors will start to demand a higher risk premium for what has usually been viewed as the riskless asset. Stay tuned.

Fed Beige Book report Wednesday will be important. This report prepared for the July 29-30 FOMC meeting will likely offer more insights on how higher tariffs is affecting growth and prices. More Fed officials are skeptical that there will be significant tariff pass-through and so respondents views on prices will be key. The labor market continues to hold up relatively well but respondents are likely to note growing signs of weakness. Likewise, growth is also holding up but we expect respondents to take note of some slowing. All in all, we expect the Beige Book to support a hold in July whilst setting the table for a cut in September.

There are plenty of Fed speakers this week. Bowman, Barr, Barkin, Collins, and Logan speak Tuesday. Barkin, Hammack, Williams, and Barr speak Wednesday. Kugler, Daly, Cook, and Waller speak Thursday. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference July 30.

June inflation data take center stage. CPI will be reported Tuesday. Headline is expected to pick up two ticks to 2.6% y/y, while core is expected to pick up a tick to 2.9% y/y. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.6% y/y and 3.0% y/y, respectively. Looking ahead to July, that model forecasts both headline and core accelerating a tick to 2.7% and 3.1%, respectively. So far, the effect of tariffs on inflation has been muted but the rising ISM prices paid components point to upside risk.

PPI will be reported Wednesday. Headline is expected to fall a tick to 2.5% y/y, while core is expected to fall three ticks to 2.7% y/y. Watch out for PPI services ex-trade, transportation, and warehousing as it feeds into the PCE calculations. In May, this measure fell to 3.0% y/y, the lowest since January 2023.

June retail sales data Thursday will also be very important. Headline is expected at 0.1% m/m vs. -0.9% in May, while ex-autos is expected at 0.3% m/m vs. -0.3% in May. The so-called control group used for GDP calculations is expected at 0.3% m/m vs. 0.4% May. Resilient jobs market conditions should continue to support retail sales activity, but consumption appears to be slowing.

The growth outlook is deteriorating. the Atlanta Fed GDPNow model estimates Q2 growth at 2.6% SAAR and will be updated Thursday. Elsewhere, the New York Fed Nowcast model estimates Q2 growth at 1.6% SAAR and Q3 growth at 1.8% SAAR and will be updated Friday. These latest readings aren't bad but are decelerating after weeks of strength.

Weekly jobless claims Thursday will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month initial claims are expected at 233k vs. 227k last week. Continuing claims are reported with a one-week lag and are expected to remain steady at 1.965 mln. Bloomberg consensus for July NFP is 95k vs. 147k in June, while its whisper number stands at 120k.

May TIC data Thursday will also be closely watched. April TIC data showed dwindling appetite for US securities and that trend should continue in May. On a 12-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to a six-month low of $1160 bln vs. $1283 bln in March. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

University of Michigan reports July consumer sentiment Friday. Headline is expected at 61.4 vs. 60.7 in June. However, both current conditions and expectations are expected to fall to 63.8 and 56.0, respectively. The sentiment data no longer appears to be a reliable indicator of future spending behavior. Instead, attention will be on inflation expectations. 1-year expectations are expected to fall a tick to 4.9% and comes after hitting a multi-decade high of 6.6% May. 5 to 10-year are expected to remain steady at 4.0% and would be down from April’s 4.4% high, the highest level since June 1991.

Canada highlight will be June CPI data Tuesday. Headline is expected to pick up two ticks to 1.9% y/y, while both core median and core trim are expected to remain steady at 3.0% y/y. The Bank of Canada will not be in a rush to resume easing given that underlying inflation is sticky at 3% and the June labor force survey was very strong. The swaps market is pricing in around 20% odds of a 25 bp cut at the next meeting July 30 and just one 25 bp cut over the next 12 months that would see the policy rate bottom at 2.50%.

EUROPE/MIDDLE EAST/AFRICA

Governor Bailey delivers his Mansion House speech Tuesday. Bailey has stuck to the BOE’s well-honed policy guidance for “a gradual and careful approach” to further rate cuts. However, sluggish UK economic activity has raised the risk that he tilts more dovish. A cut at the next meeting August 7 is nearly priced in, along with 75 bp of total easing over the next 12 months.

U.K. highlight will be June CPI data Wednesday. Headline CPI is expected to remain steady at 3.4% y/y, core CPI is expected to remain steady at 3.5% y/y, and CPIH is expected to remain steady at 4.0% y/y. Of note, services CPI is expected to fall two ticks to 4.5% y/y, which would be the lowest since December. For reference, the BOE projects headline CPI at 3.4% y/y and services CPI at 4.6% y/y in June.

U.K. labor market data Thursday will also be important. The unemployment rate is expected to remain steady at 4.6% for the three months ending in May. Elsewhere, earnings ex-bonus is expected at 4.9% y/y for the same period vs. 5.2% previously while the policy-relevant private sector earnings ex-bonus is expected at 4.8% y/y vs. 5.1% previously. The BOE projects private sector earnings and the unemployment rate to average 5.2% y/y and 4.6% in Q2, respectively. Overall, labor market slack is rising. Employment growth is subdued, and several indicators of labor demand and hiring intentions have softened.

July German ZEW survey will be reported Tuesday. The ZEW expectations index is expected at 50.7 vs. 47.5 in June, while current situation is expected at -66.0 vs. -72.0 in June. Improving sentiment readings reinforce the case that the ECB is nearly done easing. The market sees basically no odds of a cut at the next meeting July 24 and only 25 bp of total easing over the next 12 months. Vujcic and Cipollone speak Monday.

ASIA

Japan highlight will be June national CPI data Friday. Headline is expected to fall two ticks to 3.3% y/y, core (ex-fresh food) is expected to fall three ticks to 3.4% y/y, and core ex-energy is expected to remain steady at 3.3% y/y. Governor Ueda has been focusing on CPI ex-food and energy, and this measure has remained stuck between 1.5-1.6% all year. Bottom line: the BOJ will not be in any rush to resume raising rates, posing an ongoing headwind for JPY.

June trade data Thursday will also be key. Exports are expected at 0.5% y/y vs. -1.7% in May, while imports are expected at -1.0% y/y vs. -7.7% in May. Both series are likely to continue weakening under the weight of the US tariffs.

Australia highlight will be June jobs data Thursday. Consensus sees 20.0k jobs added vs. -2.5k in May, while the unemployment is expected to remain steady at 4.1% on an unchanged participation rate of 67.0%. The RBA projects the unemployment rate will rise to 4.2% in June and stabilize at 4.3% thereafter. The RBA has shifted less dovish in part because “various indicators suggest that labor market conditions remain tight.” At its last July 8 meeting, the RBA unexpectedly left the cash rate target at 3.85%. The swaps market had virtually fully priced in a 25 bp cut. The bank noted that “it could wait for a little more information to confirm that inflation remains on track to reach 2.5% on a sustainable basis.” The market is pricing in a 25 bp cut at the next meeting August 12 and 75 bp of total easing over the next twelve months for the policy rate to bottom at 3.10%.