Hold the Line

July 18, 2025
6 min read
  • Resilient US economic data will keep the Fed cautious on easing. USD can find near-term support, but downtrend holds.
  • Foreign investors piled back into US long-term securities at a record scale in May.
  • Japan underlying inflation still below 2% and will keep the BOJ on the sidelines for now.

US

USD pulled back slightly after testing a three-week high yesterday. US equities are extending their record-setting run. USD will likely remain supported in the near term as the latest set of US economic data suggests the Fed will not be in a rush to resume easing.

US retail sales overshot expectations in June. Headline retail sales rose 0.6% m/m (consensus: 0.1%) vs. -0.9% in May and the control group increased 0.5% m/m in June (consensus: 0.3%) vs. 0.2% in May (revised down from 0.4%). June’s retail sales rose more than consumer prices, suggesting the increase was driven by real demand, not just inflation.

Moreover, initial jobless claims for the BLS survey week ending July 12 unexpectedly dropped to a three-month low at 221k (consensus: 233k) vs. 228k last week. The 4-week moving average also drifted down to a six-week low at 229.5k vs. 235.75 previously. Lower claims raise the risk of solid non-farm payrolls gains in July.

Interestingly, USD should be trading much higher based on rate differentials alone. The gap probably reflects the Trump administration’s implicit support for a weaker dollar and political pressure to lower the funds rate. Bottom line: the year-to-date USD downtrend is intact in our view.

Fed Governor Christopher Waller – another top candidate to replace Powell - renewed his call yesterday for a July rate cut. Waller highlighted three reasons to cut rates by 25bps at the next July 30 meeting: (i) Tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge. (ii) Monetary policy should be close to neutral, not restrictive. (iii) Private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased.

Fed funds futures virtually rule-out odds of a July rate cut, and most Fed officials find it appropriate to hold the policy rate steady for some time. Remember, while the 2025 median Fed funds rate projection still implied 50bps of easing, the distribution of dots was more cautious with a growing number of Fed officials (7 in June vs. 4 in March) projecting no change in rates this year.

The July University of Michigan preliminary consumer sentiment report is today’s focus (3:00pm London). Headline is expected to improve to 61.5 vs. 60.7 in June but remain well below the long run average at 84.4. One-year inflation expectations are expected to print at 5.0% for a second consecutive month after hitting a multi-decade high at 6.6% May. Finally, inflation expectations 5 to 10 years out are seen falling to a five-month low at 3.9% vs. 4.0% in June and down from April’s 4.4% high, the highest level since June 1991.

A fresh update of the Atlanta Fed GDPNow model will also be published later today. As of July 17, the Atlanta Fed GDPNow model estimates Q2 growth at 2.4% SAAR, down from 2.6% on July 9.

Foreign investors piled back into US long-term securities in May (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds). Net foreign purchases of long-term US securities surged by a record $318.5bn in May after falling $-50.6bn in April which was the biggest decline in five years.

The increase was driven mainly by private foreign investors net buying of US treasury bonds & notes ($119.6bn vs. $-46.8bn in April) and US equities ($103.9bn vs. $14.4bn in April). On a 12-month cumulative basis, foreign investors increased their holdings of long-term US securities to $1399bn, up from $1159.2bn in April, and just shy of the record $1425.4 set in July 2023.

We doubt the momentum in foreign demand for US stocks and bonds can last. 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. This is a structural drag on USD.

JAPAN

USD/JPY is edging higher towards its 200-day moving average at 149.71. Japan June CPI print was mixed. Headline inflation slowed in line with consensus to a seven-month low at 3.3% y/y vs. 3.5% in April. Core ex. fresh food inflation cooled more than expected at 3.3% y/y (consensus: 3.4%) vs. 3.7% in May. Core ex. fresh food & energy was unexpectedly hotter at 3.4% y/y (consensus: 3.3%) vs. 3.3% in May, the highest since January 2024.

Nonetheless, the BOJ will not be rushing to resume raising rates because the key gauge of underlying inflation remains below 2%. CPI ex. food and energy printed at 1.6% y/y for a fourth consecutive month. The swaps market still implies 50bps of Bank of Japan (BOJ) rate hikes over the next two years and the policy rate to peak around 1.00%. The BOJ’s cautious normalization cycle is an ongoing headwind for JPY.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2