The dollar is firm as other major economies weaken. DXY is trading higher near 99.834 after three straight down days as global PMIs come in soft (see below). USD/JPY traded as low as 142.80 before recovering to trade flat near 143.75 currently. Elsewhere, the euro is trading lower near $1.13 and sterling is trading higher near $1.3405. We continue to view any dollar relief rallies with skepticism. Easing trade tensions have removed a significant headwind on the dollar over the short-term, but those tensions are likely to pick up over the next couple of weeks as new (and higher) tariffs are announced. Even a resolutely hawkish Fed has done little to help the greenback as stagflation fears intensify. Today’s S&P Global PMI readings for the U.S. should show weakness and help cut short this dollar bounce.

AMERICAS

The dollar is bid as economic weakness spreads globally. So far, the major PMIs for May have come in weak, with the eurozone and Japan composite PMIs falling back below the 50 boom/bust level. This supports the notion that U.S. tariffs will weigh on global growth. Of note, many believe that the U.S. stands to lose the most. This weakness has already shown up in the soft U.S. data and should eventually show up in the hard data. Today’s S&P Global PMIs are likely to show weakness as well and could help cut short this relief rally in the dollar.

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. However, reports suggest that the U.S. and Japan did not discuss FX levels during their bilateral meeting. Indeed, the U.S. issued a statement that “reaffirmed their shared belief that exchange rates should be market determined and that, at present, the dollar-yen exchange rate reflects fundamentals.” This tone would seem to suggest no concrete changes to the boilerplate FX language in the communique.

U.S. yields are taking another leg higher after the weak 20-year auction yesterday. The bid/cover ratio fell to 2.46 vs. 2.63 at the previous auction, while indirect bidders took 69.0% vs. 70.7% at the previous auction. The 30-year traded at a new cycle high today near 5.11% while the 10-year traded at a new cycle high of 4.61%. both have edged lower but seem poised to rise further in the coming days.

Fed officials have been united in setting up an extended pause. Barkin and Williams speak today. The odds of a June cut have fallen to 5%, around 30% in July, and around 80% in September. Looking ahead, the swaps market is pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.

S&P Global preliminary May PMIs will be the data highlight. Manufacturing is expected at 49.9 vs. 50.2 in April, services is expected at 51.0 vs. 50.8 in April, and the composite is expected at 50.3 vs. 50.6 in April. If so, the composite would be the lowest since September 2023. ISM PMIs will be reported the first week of June.

Chicago Fed reports its April National Activity Index. Headline is expected at -0.25 vs. -0.03 in March. If so, the 3-month moving average would remain steady at -0.01 and well above the -0.7 threshold that typically signals recession.

Weekly jobless claims will be of interest. 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. Bloomberg consensus for May NFP stands at 125k vs. 177k in April, while its whisper number stands at 150k. Continuing claims are reported with a 1-week lag and are expected at 1.882 mln vs. 1.881 mln the previous week.

Mexico reports mid-May CPI data. Headline is expected at 4.02% y/y vs. 3.90% previously, while core is expected at 3.97% y/y vs. 3.96% previously. If so, headline would move above the top of the 2-4% target range. Yet Banco de Mexico recently cut rates 50 bp for the third straight meeting to 8.5% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and was a dovish message as the bank seems determined to continue cutting rates despite upside risks to inflation. Next policy meeting is June 26 and another 50 bp cut to 8.0% seems likely. Looking ahead, the swaps market is pricing in nearly 125 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank publishes the account of its April meeting. At that meeting, the ECB cut rates as expected by 25 bp to 2.25%. The tone of the monetary policy statement was dovish, as 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.” President 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 25 bp was unanimous and no one argued in favor of a 50 bp.

ECB officials are taking note of the strong euro. GC member Escriva noted that the strong euro and lower energy prices have weighed on inflation. Last weekend, President Lagarde noted that the recent strength in the euro against the dollar “is counter-intuitive but can be explained by the level of uncertainty and the fact that some parts of the financial markets are losing confidence in US policies.” Holzmann, Vujcic, Nagel, Elderson, and Guindos also speak today. A cut at the next meeting June 5 is nearly priced in, while the swaps market is pricing in about 50 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.

Eurozone reported soft preliminary May PMIs. Headline manufacturing came in two ticks higher than expected at 49.4 vs. 49.0 in April, services came in over a point and a half lower than expected at 48.9 vs. 50.1 in April, and the composite came in over a point lower than expected at 49.5 vs. 50.4 in April. This was the lowest composite reading since November. Looking at the country breakdown, the German composite came in at 48.6 vs. 50.3 expected and 50.1 while the French composite came in a tick lower than expected at 48.0 vs 47.8 in April. Italy and Spain will be reported with the final May readings in early June.

German May IFO business climate survey was mixed. Headline came in two ticks higher than expected at 87.5 vs. 86.9 in April. Current assessment came in half a point lower than expected at 86.1 vs. 86.4 in April, while expectations came in nearly a point higher than expected at 88.9 vs. 87.4 in April. IFO President Fuest noted that “The recent sharp rise in uncertainty among companies has eased somewhat. The German economy is slowly regaining its footing.” The May PMI readings clearly say otherwise.

U.K. reported mixed preliminary May PMIs. Manufacturing came in a point lower than expected at 45.1 vs. 45.4 in April, services came in two ticks higher than expected at 50.0 vs. 49.0 in April, and the composite came in a tick higher than expected at 49.4 vs. 48.5 in April. Despite the improvement, the composite remained below the 50 boom/bust level for the second straight month.

There are several Bank of England speakers today. Breeden, Dhingra, and Pill all speak. Odds of a 25 bp cut in June are around 5%, while the swaps market is pricing in around 50 bp of total easing over the next 12 months.

ASIA

Bank of Japan officials remain cautious. Board member Noguchi said “I believe that the necessary approach to the future conduct of monetary policy is cautious optimism, keeping a firm eye on growing overseas risks while calmly assessing how the situation unfolds.” With regards to tapering, he said “It is unnecessary at this point to make any major changes to the current plan. The bank will need to examine the reduction plan for April 2026 onward from a longer-term perspective.” The BOJ is still seen on hold through 2025. Looking ahead, the swaps market is pricing in 25 bp of tightening over the next 12 months.

Japan reported soft preliminary May PMIs. Manufacturing rose three ticks to 49.0, services fell over a point and a half to 50.8, and the composite fell nearly a point and a half to 49.8. This is the lowest composite reading since March and is likely to remain under downward pressure as tariffs bite.

Australia reported soft preliminary May PMIs. Manufacturing came in steady at 51.7, services fell half a point to 50.5, and the composite fell four ticks to 50.6. This is the lowest composite reading since February and is likely to remain under downward pressure as tariffs bite.

Reports suggest exchange rates are indeed part of the trade negotiations. Korea Economic Daily cited an unnamed government official saying that U.S. officials believes a weak won is a fundamental cause of Korea’s trade surplus. The Finance Ministry said in a statement that the talks are ongoing and that nothing has been decided yet. Despite U.S. denials, it’s clear that a weaker dollar is desired.

Sri Lanka central bank unexpectedly cut rates 25 bp to 7.75%. Deflation continued to ease in April to -2.0% y/y vs. the cycle low of -4.2% y/y in February. With deflation lingering, we saw some risks of a dovish surprise. The bank said “The Board is of the view that this measured easing of monetary policy stance will support steering inflation toward the target of 5%, amidst global uncertainties and current subdued inflationary pressures.”