The dollar was mostly weaker against the majors last week. NOK, AUD, and NZD outperformed while JPY, SEK, and CHF underperformed. The dollar got a bit of a reprieve Friday after the better than expected jobs data, but we expect weakness to resume this week as inflation data come into focus. For now, the U.S. economy remains relatively resilient but higher inflation readings due to tariffs may start to bite. We also see risks of negative trade-related headlines this week that could further weigh on the greenback. A heavy slate of UST auctions will test foreign appetite at a time of heightened uncertainty.
AMERICAS
The May jobs report suggests the U.S. economy continues to hold up relatively well. As we have noted throughout this economic cycle, the labor market remains key. As long as jobs are being created, consumption will continue to drive economic growth. This has been seen in retail sales and personal spending data through April. May retail sales will be reported next Tuesday. There will be headwinds from other sectors of the economy, but private domestic demand should remain solid as we move into H2.
Indeed, growth remains firm. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.8% SAAR, with personal consumption seen rising 2.6% SAAR. It will be updated Monday after the data. Elsewhere, 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 Friday.
The solid growth outlook means that U.S. equities can move higher. Despite the ongoing tariff concerns, the S&P 500 has recovered sharply and is approaching the February all-time high near 6147. Break above that sets up a test of the daily channel dating back to December 2021 that comes in near 6319 currently.
Despite a solid outlook for the U.S., we expect the dollar to remain under pressure. This is due largely to ongoing uncertainty regarding U.S. tariff and fiscal policies that is undermining confidence in the greenback. Looking at the euro, we expect a test and eventual break above the April high near $1.1575, which would set up a test of the late October 2021 high near $1.17. Sterling made a new cycle high near $1.3615 last week and is on track to test the January 2022 high near $1.3750.
The Fed media blackout remains in effect this week. While the data have been a bit mixed, the overall picture supports the prevailing Fed view that it can be patient. The market sees no chance of a cut next week, only around 15% odds of a cut in July, and around 66% odds of a cut in September. A cut is not fully priced in until the October meeting. Furthermore, the swaps market is pricing in 50-75 bp of total easing over the next 12 months. The Fed outlook will be tested by this week’s inflation data.
May inflation data come into focus. New York Fed inflation expectations will be reported Monday. In April, 1-year inflation expectations were unchanged at 3.6% while 3-year expectations rose two ticks to 3.2%, the highest reading since July 2022. In contrast, 5-year expectations fell two ticks to 2.7%, matching the December 2024 low. Still-elevated inflation expectations support the Fed’s intention to remain cautious about cutting.
CPI will be reported Wednesday. Headline is expected at 2.5% y/y vs. 2.3% in April and core is expected at 2.9% y/y vs. 2.8% in April. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.4% and 2.8%, respectively. Looking ahead, that model forecasts June headline and core at 2.7% and 3.0%, respectively. The rising ISM prices paid components point to a reacceleration in inflation pressures. Moreover, the June Fed Beige Book warned that “Prices have increased at a moderate pace since the previous report. There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. All District reports indicated that higher tariff rates were putting upward pressure on costs and prices.”
PPI will be reported Thursday. Headline is expected at 2.6% y/y vs. 2.4% in April while core is expected to remain steady at 3.1% y/y. Keep an eye on PPI services ex-trade, transportation, and warehousing as it feeds into the PCE reading. In April, this measure fell one full percentage point to 3.3% y/y, the lowest since March 2023.
With price pressures expected to pick up, we look for long-end yields to edge higher. With the Fed on hold for the foreseeable future, the short end remains anchored and so the bear-steepening trade should continue. However, this steepening is likely to be contained, as the 10-year yield has seen strong resistance in the 4.5-4.6% area. Likewise, the 30-year yield has seen strong resistance in the 5.0-5.1% area.
Demand for USTs will be tested with heavy supply this week. Treasury auctions $58 bln of 3-year notes Tuesday. At the last auction, the bid/cover was 2.56 and indirect bidders took 62.4%. $39 bln of 3-year notes will be sold Wednesday. At the last auction, the bid/cover was 2.60 and indirect bidders took 71.2%. Lastly, $22 bln of 30-year bonds will be sold Thursday. At the last auction, the bid/cover was 2.31 and indirect bidders took 58.9%. Coming during elevated uncertainty and May inflation data, these auctions could get sloppy. Stay tuned.
Q1 household net worth will be reported Thursday. Household balance sheets remain strong and are supportive of consumer spending activity. Net worth increased by $164 bln in Q4 after rising $4.8 trln in Q3. In Q4, a decline in the value of holdings of debt securities and real estate was offset by an increase in the value of corporate equities holdings and other assets. The ratio of net worth to disposable personal income dipped to 772% of GDP in Q4 from 781% of GDP in Q3, and remains just under its all-time high of 833% of GPD in Q1 2022.
University of Michigan reports preliminary June consumer sentiment Friday. Headline is expected at 53.5 vs. 52.2 in May, with current conditions seen falling a tick to 58.8 and expectations seen rising four ticks to 48.3. 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 one tick to 6.5%. Of note, the May reading was the highest since November 1981. However, 5 to 10-year expectations are expected to remain steady at 4.2%. Of note, the April reading of 4.4% was the highest level since June 1991.
EUROPE/MIDDLE EAST/AFRICA
After last week’s 25 bp cut, reports emerged that ECB officials are considering a pause at the July meeting. Given this forward guidance, the market is pricing in only 25% odds of a cut next month. However, the swaps market is pricing in another 50 bp of easing over the next 12 months that would see the policy rate bottom near 1.5%. There are plenty of ECB speakers this week that will help shape the ECB narrative. Elderson and Escriva speak Monday. Villeroy, Holzmann, and Rehn speak Tuesday. Lane and Cipollone speak Wednesday. Muller, Escriva, Knot, Schnabel (twice), and Guindos speak Thursday. Escriva speaks Friday.
European Central Bank reports its forward-looking wage tracker Wednesday. Recall that negotiated wage growth eased to 2.4% y/y in Q1 vs. 4.1% in Q4 and the multi-decade high of 5.5% in Q3. This was in line with the ECB’s last wage tracker, where unsmoothed one-off payments indicated an average negotiated wage growth of 2.5% y/y in Q1 and 2.8% y/y over 2025. Bottom line: the eurozone disinflation process remains on track and should allow the ECB to continue easing.
U.K. highlight will be labor market data Tuesday. The unemployment rate is expected to rise a tick to 4.6% for the three month period ending in April. Elsewhere, weekly earnings ex-bonus are expected at 5.3% y/y vs. 5.6% previously, while the policy-relevant private sector earnings ex-bonus are expected at 5.3% y/y vs. 5.6% previously. Over Q2, the Bank of England projects private sector earnings and the unemployment rate to average 5.2% y/y and 4.6%, respectively. Overall, labor market slack is rising and yet the U.K. disinflationary process is losing momentum and backs up the case for a more cautious BOE easing path. The swaps market continues to price in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 3.75%.
April real sector data Thursday will also be important. Real GDP is expected at -0.1% m/m vs. 0.2% in March, reflecting the negative impact of tariffs on activity. Indeed, the composite PMI dropped below the 50 boom/bust level in April to the lowest level since September 2023 and warns of further weakness ahead. Elsewhere, IP is expected at -0.5% m/m vs. -0.7% in March, services index is expected flat m/m vs. 0.4% in March, and construction output is expected at 0.2% m/m vs. 0.5% in March.
Norway reports May CPI data Tuesday. Headline is expected at 2.7% y/y vs. 2.5% in April while underlying is expected at 2.9% y/y vs. 3.0% in April. For reference, the Norges Bank projects headline and underlying at 2.7% and 3.1%, respectively. Inflation has fallen markedly from the peak but is still above the 2% target, suggesting the Norges Bank can afford to be patient before starting to cut rates. At its May 8 meeting, the bank kept rates steady at 4.50% and pointed out that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” Next meeting is June 19 and no change is expected then. Updated macro forecasts will be released, however. The March forecasts saw 50 bp of easing by year-end to 4.00%, which is slightly more than swaps market pricing that’s closer to 25 bp.
ASIA
Japan reports April current account data Monday. An adjusted surplus of JPY2.589 trln is expected JPY2.723 trln in March. However, the investment flows will be of more interest. The March data showed that Japan investors became net sellers of U.S. bonds (-JPY563 bln) after four straight months of net buying. Japan investors stayed net sellers of both Australian bonds (-JPY158 bln) and Canadian bonds (-JPY163 bln) for the third straight month. Investors stayed net buyers of Italian bonds (JPY109 bln) for the third straight month. Overall, Japan investors became total net sellers of foreign bonds (-JPY731 bln) after two straight months of net buying. Still, it’s still too early to say that Japan investors have stopped chasing higher yields abroad.
The spike in JGB yields proved temporary after the Bank of Japan sent calming signals to the market. This calm will be tested this month, as reports emerged that the bank may announce a reduction of its bond-buying operations at the upcoming June 16-17 meeting. Reports suggest any reductions would be modest, however. The BOJ is currently paring its bond-buying at a pace of JPY400 bln per quarter. USD/JPY has remained in the 140-150 range since early April. Until something significantly changes in either the BOJ or Fed outlook, we expect this range to hold. However, given our bias for a weaker dollar, we expect the 145 area will be difficult to breach for a prolonged period and so look for downside risks to USD/JPY.
Q2 BSI survey will be reported Thursday. The Ministry of Finance’s Business Sentiment Index (BSI) for large enterprises across all industries was soft in Q1. Headline dipped to 2 in Q1 vs. 5.7 in Q4 but the index is not a very reliable bellwether indicator of real GDP. The Tankan report due out June 30 is better. However, the drop in the composite PMI to 50.2 in May warns of a slowing economy. Since the Nikkei peaked at 42427 in July 2024, Japan equities have underperformed across the major developed economies, even the U.S. Much of this is due to the fact that the BOJ is tightening at a time when every other major central bank is easing. With risks to the economic outlook rising, we expect Japan equities to continue underperforming despite expectations of a relatively mild tightening cycle.
