The dollar is bid as risk off impulses rise as Middle East tensions ratcheted up. The dollar is king for a day, with JPY, CHF, and gold also benefitting from safe haven flows. DXY is trading higher near 98.387 after two straight own days. USD/JPY traded as low as 142.80 but has recovered to trade higher near 144.20. The 140-145 range continues to hold but the pair is likely to test the downside if risk off impulses continue. The euro is trading lower near $1.1510 after making a new cycle high yesterday near $1.1630, while sterling is trading lower near $1.3535 after making a new cycle high earlier near $1.3630. The prospects of a protracted conflict between Israel and Iran (see below) could see periodic haven demand for the greenback, but we believe the fundamental downtrend remains intact as weaker data (see below) increases the scope for a more dovish Fed. Strangely, UST yields are higher on the day and this supports our view that the dollar gains from the current risk off impulses are likely to be limited.
AMERICAS
Unpredictable US trade policies remain a risk for the dollar. Last night, the Commerce Department announced that washing machines, dishwashers, refrigerators, and other household appliances made with steel parts will soon be subject to new tariffs. Specifically, it said tariffs would take effect on so-called steel derivative products June 23 and will be set at 50%. This comes after President Trump warned that he may soon hike auto tariffs from their current 25% level.
The labor market is showing signs of cracking. Initial claims came in at 248k vs. 242k expected and a revised 248k (was 247k) the previous week. This was the highest since October 2024, while the 4-week moving average of 240k was the highest since late August 2023. Elsewhere, continuing claims came in at 1.956 mln vs. 1.910 mln expected and a revised 1.902 mln (was 1.904 mln) the previous week. This was the highest since mid-November 2021. The rising claims data point to larger cracks forming in the labor market. Next week's initial claims reading will be for the BLS survey week containing the 12th of the month. If they continue to rise, the market will start positioning for a weak June NFP. There is no Bloomberg consensus yet but its whisper number stands at 112k vs. 139k actual in May. As things stand, we could get a sub-100k NFP, which would be the worst since October's 44k.
President Trump seemed to acknowledge growing risks to the labor market. Specifically, he said “Our great Farmers and people in the Hotel and Leisure business have been stating that our very aggressive policy on immigration is taking very good, long time workers away from them, with those jobs being almost impossible to replace. Changes are coming.”
PPI came in soft. Headline came in as expected at 2.6% y/y vs. a revised 2.5% (was 2.4%) in April, while core came in a tick lower than expected at 3.0% y/y vs. a revised 3.2% (was 3.1%) in April. PPI services ex-trade, transportation, and warehousing, which feeds into the PCE reading, fell three ticks to 3.0% y/y, the lowest since January 2023. The Cleveland Fed’s inflation Nowcast model sees both April and May headline and core PCE at 2.3% and 2.6%, respectively.
We think that this week’s data sets up a dovish hold from the Fed next week. The market sees no chance of a cut next week, rising to around 25% in July. However, the market is now fully pricing in a cut in September vs. October at the start of this week. Furthermore, the swaps market is starting to price in slightly more than 75 bp of total easing over the next 12 months. President Trump continues to jawbone the Fed. While he said he wouldn’t fire Chair Powell, Trump then called on the Fed to lower rates by two percentage points.
Growth remains firm. The New York Fed’s Nowcast model is tracking Q2 growth at 2.3% SAAR and Q3 growth at 2.4% SAAR. Both readings will be updated today. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.8% SAAR, with personal consumption seen rising 2.5% SAAR. It will be updated next Tuesday after the data.
Demand for $22 bln 30-year bonds yesterday was solid. The bid/cover was 2.43 vs. 2.31 in May, while indirect bidders took 65.2% vs. 58.9% in May. Solid demand was also seen for the 3-year and 10-year note auctions earlier this week. Between strong demand for new issuance and benign inflation data this week, UST yields have fallen further from the late May peaks.
University of Michigan preliminary June consumer sentiment will be the highlight. Headline is expected at 53.6 vs. 52.2 in May, with current conditions seen rising four ticks to 59.3 and expectations seen rising nearly two points to 49.7. With consumption remaining fairly robust, the sentiment readings no longer appear to be a reliable indicator of future spending behavior. Instead, attention will be on inflation expectations, as last month’s readings suggest they’re at risk of becoming unanchored. 1-year inflation expectations are seen falling two ticks to 6.4%. Of note, the May reading was the highest since November 1981. However, 5 to 10-year expectations are expected to fall a tick to 4.1%. Of note, the April reading of 4.4% was the highest level since June 1991.
Household net worth fell sharply in Q1. It decreased by -$1.6 trln after rising $164 bln in Q4, and was driven by a sharp decline in the value of holdings of corporate equities. If sustained, lower household net worth points to slower growth in real personal consumption expenditure ahead.
EUROPE/MIDDLE EAST/AFRICA
As widely expected, Israel launched airstrikes on Iran last night. Israel declared a state of emergency and warned of retaliatory missile and drone attacks. Israel Prime Minister Netanyahu said the operation “will continue for as many days as it takes.” In response, Iranian supreme leader Ayatollah Ali Khamenei said Israel will “pay a very heavy price” and should “expect a severe response from Iran’s armed forces.” US Secretary of State Rubio confirmed the US was not involved in the strikes. However, the attack came hours after President Trump explicitly urged Israel to refrain from striking Iran until the U.S. had exhausted all of its diplomatic efforts regarding Iran's nuclear program. Indeed, a sixth round of talks were schedule for this Sunday in Oman. Oil prices are up over 7% and Brent is trading at the highest since early April.
ECB officials continue to push back against market easing expectations. This time, it was Executive Council member Schnabel’s turn, as she said “This monetary-policy cycle is coming to an end as medium-term inflation is stabilizing around target.” Given the recent forward guidance, the market is pricing in only 15% odds of a cut next month. However, the swaps market is pricing in another 25 bp of easing over the next 12 months vs. 50 bp at the start of this week.
BOE/Ipsos May inflation expectations were mixed. 1-year expectations fell two ticks to 3.2%, 2-year expectations were steady at 3.2%, and 5-year expectations were steady at 3.6%. While the Bank of England is widely expected to keep rates steady next week, we believe that slow growth and a weak labor market will ensure a dovish hold that sets up further easing in Q3. Indeed, odds of an August cut are around 80%, with the swaps market pricing in 75 bp of total easing over the next 12 months.
ASIA
Reports suggest Bank of Japan officials see inflation a bit higher than was expected earlier this year. While rates are expected to be kept steady at next week’s meeting, a discussion around this could open the door for the next hike to come sooner than expected. The bank just updated its macro forecasts at the last meeting April 30-May 1, with the next update to come at the July 30-31 meeting. Of note, the report also suggests that a pause is warranted next week due to tariff uncertainty, but added if the tariffs turn out not to be as disruptive, then that would support a discussion about whether to hike or not, presumably at the July meeting. The swaps market still does not see the next hike until 2026.
China reported May money and new loan data. New loans came in at CNY620 bln vs. CNY285 bln in April, while aggregate financing came in at CNY2.29 trln vs. CNY1.16 trln in April. Much of the growth was driven by government borrowing, as bond issuance rose 20% from last year to nearly CNY1.5 bln in May. Elsewhere, household rose only CNY54 bln, with the YTD total of CNY572 bln the lowest dating back to 2009, when this data series began. Overall, new loan growth slowed a tick to 7.1% y/y and was the slowest on record since 1999, when this data series began. Bottom line: stimulus efforts so far have had little impact on households, with the government doing most of the heavy lifting. More stimulus efforts are expected in the coming months.
