May’s Growth Chronicles
US
USD, US stocks and Treasuries are consolidating yesterday’s sell-off. The synchronized decline in the dollar, S&P500 and Treasuries highlight the loss of confidence in US policies.
The ongoing trade war is leading countries to reassess their economic dependencies on the US while President Donald Trump's “One Big Beautiful” tax and spending package has raised concerns over the escalating US fiscal burden. As written, the tax bill under consideration by the House is estimated to substantially add to the deficit, even if accounting for possible tariff revenue.
The G7 finance ministers and central bank governors summit ends today. There is a possibility that the post-meeting communique tweaks the language on currency policy to fit into market perceptions that the US wants other currencies to strengthen vis a vis the dollar to address global economic imbalances.
The US May PMI is due today (2:45pm London) and could point at rising risk the US enters a period of stagflation. Consensus see the composite PMI at 50.3 vs. 50.6 in April, manufacturing at 49.9 vs. 50.2 in April, and services at 51.0 vs. 50.8 in April.
Weekly jobless claims will also be of interest (1:30pm London). That’s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 230k vs. 229k the previous week. Richmond Fed President Tom Barkin (non-voter) participates in a fireside chat (1:00pm London) and New York Fed President John Williams gives keynote remarks (7:00pm London).
Bottom line: the fundamental backdrop remains difficult for USD for three reasons: (i) the Trump administration implicitly supports a weaker dollar, (ii) the US economy faces stagflation risk, and (iii) US policy credibility has been undermined by the trade war.
EUROZONE
EUR/USD is lower near 1.1300 following poor regional PMI reports. The composite PMI for France printed at 48.0 (consensus: 48.1) vs. 47.8 in April while Germany’s unexpectedly dropped back into contraction territory at 48.6 (consensus: 50.3) vs. 50.1 in April.
The Eurozone May PMI and German IFO business climate index are up next (both at 9:00am London). Consensus see the Eurozone composite PMI at 50.6 vs. 50.4 in April, manufacturing at 49.2 vs. 49.0 in April, and services at 50.5 vs. 50.1 in April. The German IFO business climate index is projected at 87.4 vs. 86.9 in April as trade hostility has peaked.
Overall, downside risks to Eurozone economic growth have increased due to greater protectionist policies. The swaps market is pricing in 50bps of total easing by the ECB over the next 12 months and the policy rate to bottom at 1.75%.
We don’t expect new material policy guidance from the ECB’s Account of the April 16-17 policy meeting (12:30pm London). At that meeting, the ECB delivered on expectations and cut the policy rate by 25bps to 2.25%. The tone of the monetary policy statement was dovish. The ECB reiterated that “the disinflation process is well on track” but warned that “the outlook for growth has deteriorated owing to rising trade tensions.”
The ECB also removed from the statement the sentence that “Monetary policy is becoming meaningfully less restrictive.” ECB President Christine Lagarde explained that assessment of the restrictiveness was “meaningless at this point in time” because the neutral rate is no longer reliable in a shock-prone world. Finally, Lagarde confirmed that the decision to cut rates by 25bps was unanimous and no one argued in favor of a 50bps.
UK
GBP/USD is holding above 1.3400. The UK May PMI is expected to remain indicative of a weak near-term economic activity (9:30am London). Consensus see the composite PMI at 49.3 vs. 48.5 in April, manufacturing at 46.1 vs. 45.4 in April, and services at 50.0 vs. 49.0 in April. Regardless, the UK disinflationary process is losing momentum and argues for a more cautious Bank of England (BOE) easing path which is GBP supportive.
JAPAN
USD/JPY had a brief uptick after the US and Japan confirmed existing currency policy and did not discuss foreign exchange levels. USD/JPY subsequently edged lower while Japanese government bond yields are breaking higher at the long-end of the curve.
Bank of Japan (BOJ) board member Asahi Noguchi acknowledged the “sudden” move in yields but noted “I can’t simply conclude that they are abnormal…so I believe it would be inappropriate to intervene without reason and attempt to manipulate the situation in any way.”
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). Given 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.
Japan private sector activity slips back into contraction in May. The composite PMI fell to 49.8 vs. 51.2 in April, the services PMI dropped 1.6 points to 50.8, and the manufacturing PMI improved 0.3 points to 49.0. The swaps market ignored the data and still implies 50bps of BOJ rate hikes to 1.00% over the next two years.
AUSTRALIA
AUD/USD is struggling to sustain a break above its 200-day moving average at 0.6450. Australia reported soft May PMI, strengthening the RBA’s dovish policy stance. The composite PMI dipped 0.4 points to a three-month low at 50.6, the services PMI dropped 0.5 points to a six-month low at 50.5, and the manufacturing PMI was unchanged at 51.7. RBA cash rate futures price-in a total of 75bps of cuts to a low of 3.10% in the next 12 months.
