The dollar is stabilizing ahead of NFP. DXY is trading flat for the second straight day near 96.809 but remains vulnerable to a weak jobs report (see below). The euro is trading flat near $1.18, while sterling is trading higher near $1.3665 after Starmer said Chancellor Reeves would remain in her post “for many years to come” (see below). Further gains are likely for both after this period of profit-taking consolidation ends. USD/JPY is trading flat near 143.75 despite hawkish BOJ comments (see below). While the dollar is enjoying a small measure of stability right now, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold. Trump jawboning the Fed won’t help matters as Fed independence remains a concern (see below). Market repricing of Fed easing along with weaker data and fading risk off impulses should keep the dollar under pressure. Today’s jobs report is key.
AMERICAS
President Trump’s attacks on Fed Chair Powell are getting worse. He said Powell “should resign immediately” and again referred to him as “Too Late.” The good news is that Trump seems to realize that he has no power to fire Powell. The bad news is that the continued attacks on the Fed reinforce the notion that Trump is likely to appoint a replacement who is much more malleable than Powell is. Any erosion of Fed independence would not be taken well by the markets, to state the obvious.
Most Fed officials remain cautious. Richmond Fed President Barkin said “The numbers on the economy are very solid. We haven’t had the urgency of saying we’ve got an economy going the wrong way. So long as there’s no urgency from the bigger environment, I think that one does what one does when you drive through fog, which is go slowly.” Fed officials appear to be ruling out a July cut. Barring a total collapse in the economy, we concur. Odds of a July cut are around 25% while a cut is fully priced in for September. Looking ahead, the swaps market is now pricing in 100 bp of total easing over the next 12 months, with nearly 80% odds of a fifth 25 bp cut. Bostic speaks today.
Highlight will be the June jobs report. Bloomberg consensus for June NFP is 106k vs. 139k in May, while its whisper number dropped to 96k after ADP estimated -33k private sector jobs were lost in June. This was the first drop in ADP since March 2023, when NFP came in at 85k. However, that 85k looks even worse as it’s sandwiched between readings of 306k in February and 216k in April 2023. We have been warning of a sub-100k print all week and the weak ADP number only raises those risks. The unemployment rate is expected to rise a tick to 4.3%, while average hourly earnings are expected to fall a tick to 3.8% y/y. Keep an eye on the labor force, as a big drop in May helped prevent a sharp jump in the unemployment rate.
June ISM services PMI will also be important. Headline is expected at 50.6 vs. 49.9 in May. Prices paid are expected to rise two ticks to 68.9, while employment is expected to fall over a point to 49.5. The regional Fed ISM services prints suggest risks are skewed to the upside. Of note, the S&P Global services PMI dipped in June to a two-month low of 53.1 vs. 53.7 in May.
May trade data will also be reported. The trade deficit in both goods and services is expected at -$71.0 bln after narrowing at a record pace in April to -$61.6 bln, which was the smallest since 2023 and due to a tariff-related -16.3% m/m record plunge in imports. Of note, net exports were the biggest drag on Q1 growth and subtracted -4.6 ppt from the headline. While that should improve in Q2, it appears that weaker consumption is offsetting that improvement.
The growth outlook is deteriorating. The New York Fed Nowcast model now estimates Q2 growth at 1.7% SAAR vs. 1.9% the previous week and Q3 at 1.9% SAAR vs. 2.1% the previous week. These latest readings aren't bad but are clearly decelerating after weeks of strength. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 2.5% SAAR vs. 2.9% previously. Both models will be updated today.
EUROPE/MIDDLE EAST/AFRICA
GBP and gilts plunged yesterday on speculation Chancellor Reeves may not remain in her post for long. The concern is that Reeves’s potential replacement would most likely be a fiscal dove given Prime Minister Starmer’s constraints in steering his Labour government away from the left. In response to the market turmoil, Starmer eventually gave Reeves his full backing saying she would remain as Chancellor “for many years to come.” Regardless, the government’s sharp U-turn on welfare reforms means higher taxes are in the pipeline when the next 2025 Autumn Budget is presented in October. Higher taxes, combined with weak underlying UK GDP growth and labor market slack emerging, could force the BOE to cut the policy rate more aggressively than anticipated. The swaps market is pricing in 75 bp of total easing over the next 12 months. In contrast, the ECB’s rate-cutting phase is close to wrapping up and so EUR/GBP has room to edge higher towards 0.8800.
U.K. June DMP inflation expectations rose. 1-year expectations rose to a three-month high of 3.3% vs. expectations of remaining steady at 3.0%. 3-year expectations also printed at a three-month high of 2.9% vs. 2.7% in May. Both series are above their series lows of 2.5% in October 2024 and will likely keep the Bank of England on a cautious easing path, at least for now.
The European Central Bank publishes the account of its June meeting. At that meeting, the ECB trimmed the policy rate 25 bp to 2.00%, as expected. Only one Governing Council member didn’t support the decision to cut. Importantly, President Lagarde stressed that the ECB is likely “getting to the end of the monetary-policy cycle.” This view has since been echoed by a majority of governing council members. The swaps market is still pricing in only one more 25 bp cut over the next 12 months.
Switzerland reported June CPI data. Headline came in two ticks higher than expected at 0.1% y/y vs. -0.1% in May, while core picked up a tick as expected to 0.6% y/y. At the last meeting June 19, the SNB cut the policy rate 25 bp to 0% due to easing inflationary pressures. Benign inflation pressures mean a negative policy rate cannot be ruled out. The swaps market is pricing in another 25 bp of easing over the next 12 months that would see the policy rate bottom at -0.25%. Regardless, CHF safe haven status outweighs the drag from the likelihood of negative rates.
National Bank of Poland delivered a dovish surprise and cut rates 25 bp to 5.0%. It was expected to keep rates steady at 5.25%. The bank cuts its inflation forecasts for 2025 to 3.5-4.4% vs. 4.1-5.7% previously, for 2026 to 1.7-4.5% vs. 2.0-4.8% previously, and for 2027 to 0.9-3.8% vs. 1.1-3.9% previously. It noted that “According to available forecasts, CPI inflation will fall below the upper limit of deviations from the NBP inflation target in the coming months. Taking this into account, the Council considered it justified to adjust the level of interest rates.” Governor Glapinski holds his post-decision press conference today and should provide more hints about future policy. The swaps market is pricing in 100 bp of total easing over the next 12 months, followed by another 50-75 bp over the subsequent 12 months that would see the policy rate bottom between 3.25-3.50% vs. 3.75% at the start of this week.
ASIA
Bank of Japan board member Takata stuck to his hawkish script. Takata said “I believe that the bank is currently only pausing its policy interest rate hike cycle and should continue to make a gear shift after a certain period of ‘wait and see.’” We expect the economy to continue slowing, which should keep the BOJ very cautious. The swaps market continues to price in only 25 bp of total tightening over the next 12 months.
Caixin reported June services and composite PMIs. Services came in three ticks lower than expected at 50.6 vs. 51.1 in May. However, due to a strong manufacturing print of 50.4 vs. 48.3 in May, the composite PMI rose to 51.3 vs. 49.6 in May and was the highest since March. Despite the firmer PMI readings, we believe China’s economic recovery remains fragile and we expect more stimulus measures in the second half of the year.
President Trump announced a trade deal with Vietnam. Imports from Vietnam will face a 20% tariff, while transshipments from other countries will face a 40% rate. In return, Vietnam has reportedly agreed to drop all tariffs on US imports. Of note, Vietnam faced a 46% reciprocal tariff rate back on April 9. Vietnam is the 6th biggest source of imports into the US and so the 20%/40% rates will likely raise the US effective tariff rate. On the other hand, Vietnam is not a major export destination for the US (it’s not even in the top 20) and so the benefits to the US aren't so obvious. As we've been pointing out, it's really all about China, the EU, and Japan. Other minor trade deals are likely before the end of the tariff pause July 9, but deals with the Big Three remain elusive.
