Wait and See

July 18, 2025
  • Resilient US economic data will keep the Fed cautious on easing. USD can find near-term support, but downtrend holds. UofM consumer sentiment index is today’s data highlight.
  • 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 after flirting near a one-month 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 points to 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 of 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 – a top candidate to replace Powell – renewed his call for a July rate cut. Yesterday, 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 takes center stage today (10:00am New York). 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 consolidating under 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 May. 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.

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