US

USD stabilized against all major currencies after falling towards a three-year low yesterday. 10-year Treasury yields are directionless around 4.40% since peaking at 4.62% on May 22.

The US economy remains on solid footing. As of June 2, the Atlanta Fed GDPNow model estimates Q2 growth at 4.6% SAAR vs. 3.8% on May 30. The upward revision was driven by a pick-up in real personal consumption expenditures growth (4.0% from 3.3%) and real gross private domestic investment (0.5% from -1.4%). The next update is due Thursday.

Nonetheless, leading indicators point to subdued growth prospects. The Conference Board Leading Economic Index fell sharply by 1.0% m/m in April, the largest monthly decline since March 2023, and the downturn in US manufacturing activity unexpectedly deepened in May. The ISM manufacturing index dipped 0.2pts to a six-month low at 48.5 (consensus: 49.5).

Meanwhile, US protectionist trade policies have raised the risk the US economy enters a period of stagflation. Yale’s non-partisan Budget Lab policy research center estimates the 2025 tariffs to date (including the effects of the higher 50% steel & aluminum tariffs announced May 30), would bring the overall US average effective tariff rate to 15.1% (up 12.7pp), the highest since 1938. The higher tariffs would lower real GDP growth by -0.5pp over calendar year 2025 (Q4-Q4) and imply an increase in consumer prices of 1.4% in the short-run.

The OCED was equally downbeat on the US economic outlook. In its latest June report, the OCED projects real GDP growth to slow significantly due in part “to the substantially higher effective tariff rate on imports.” The OCED forecasts growth in the year to Q4 2025 of just 1.1% vs. 2.5% in Q4 2024 and annual headline inflation to increase sharply to 3.9% by the end of 2025.

The April JOLTS data is today’s focus (10:00am New York, 3:00pm London). Job openings are expected at 7100k vs. 7192k in March which would be the lowest since December 2020 but still consistent with a healthy labor market.

Overall, the fundamental backdrop remains difficult for USD for three reasons: (i) the Trump administration implicitly supports a weaker dollar, (ii) the US economy faces stagflation risk, and (iii) confidence in US trade, fiscal, and security policies has taken a big hit.

EUROZONE

EUR/USD retraced 50% of yesterday’s gain, trading near 1.1400. Eurozone preliminary inflation slows more than expected in May. Headline CPI fell to 1.9% y/y (consensus: 2.0%) vs. 2.2% in April. Core CPI dipped 0.4pts to 2.3% y/y (consensus: 2.4%), matching the January 2022 low, while services CPI fell 0.8pts to 3.2% y/y, the lowest since March 2022.

The ECB is widely expected to cut the policy rate 25bps to 2.00% Thursday. However, we doubt the decision to cut the policy rate will be unanimous as a few ECB policymakers (Holzmann, Nagel, Müller, and Schnabel) have recently signaled preference for a pause. A split vote would lead to a modest upward adjustment to ECB rate expectations in favor of EUR. Interest rate futures imply 60bps of ECB easing over next 12 months and the policy rate to bottom between 1.50% and 1.75%.

SWITZERLAND

EUR/CHF is trading near the middle of its 1-month 0.9300-0.9420 range. Swiss May CPI matched consensus. Headline CPI printed at -0.1% y/y vs. 0% in April while core was 0.5% y/y vs. 0.6% in April. Headline CPI inflation is tracking below the Swiss National Bank (SNB) projection of 0.3% over Q2.

However, SNB President Martin Schlegel cautioned last week that “the SNB does not necessarily have to react” to negative inflation figures. The swaps market disagrees and continues to imply 36% odds of a 50bps cut to -0.25% at the next June 19 SNB meeting.

AUSTRALIA

AUD is underperforming most major currencies. The Minutes of the RBA May policy meeting offered more details behind the discussion to cut the cash rate target by 50bps or 25bps. The RBA ultimately trimmed the cash rate target 25bps to 3.85% in part to “ensure that monetary policy settings remained predictable at a time of heightened uncertainty.”

The RBA noted that a 50bps would be warranted if “household consumption does not pick up as quickly as envisaged in the baseline forecast or that wages growth slows by more than forecast alongside a softening labour market.” The RBA added that 50bps cut would also be appropriate in “a scenarios in which global policy unpredictability had more negative consequences for the world economy than was assumed in the baseline.”

Bottom line: the bar for more RBA cuts is low and a headwind for AUD. RBA cash rate futures imply nearly 80% odds of a 25bps cut at the July 8 meeting and a total of almost 100bps of easing over the next 12 months to a low of 2.85%.

NEW ZEALAND

NZD/USD tracked AUD/USD lower. RBNZ announced changes to availability and pricing of some liquidity facilities effective June 17. The changes are operational and have no implications for the stance of monetary policy.

Last week, the RBNZ cut the Official Cash Rate (OCR) by 25bps to 3.25% but signaled little appetite for more easing. Governor Christian Hawkesby stressed that “when we next meet in July a further cut in the OCR is not a done deal…We’re really more in a phase where we are taking considered steps, data dependent.” The swaps market implies 30% odds of a July rate cut and the OCR to bottom at 3.00% over the next 6 months.

JAPAN

USD/JPY is range bound around 142.80. Japan 10-year government bond (JGB) yields fell as much as 4bps in response to strong demand at the auction. The bid-to-cover ratio at the ¥2.6 trillion 10-year debt auction was 3.66, the highest since April 2024. A ¥605bn 30-year debt auction is due Thursday. 30-year JGB yields are consolidating around 2.95% after peaking at 3.19% on May 21.

Bank of Japan (BOJ) Governor Kazuo Ueda suggests staying the course with the tapering in JGB purchases. The BOJ is currently trimming its JGB purchases by about ¥400 billion per quarter through March 2026 and will conduct an interim assessment of its tapering plan at the June 17 policy-setting meeting. We expect the bank to maintain the current pace of reduction in JGB purchases and reiterate that it stands ready to make one-off purchases as needed to smooth market functioning.

Ueda also stuck to the bank’s cautious policy guidance. Ueda stressed “We have no intention to make room for future rate cuts by forcibly raising our policy rate even when we can’t expect improvement in the economy and inflation.” The swaps market still implies about 50bps of BOJ rate hikes to 1.00% over the next two years.

CHINA

CNH is outperforming all major currencies ahead of upcoming talks between US President Donald Trump and his Chinese counterpart Xi Jinping. White House Press Secretary Karoline Leavitt said yesterday “I can confirm that the two leaders will likely talk this week.”

China private sector manufacturing activity unexpectedly shrinks in May. The Caixin manufacturing PMI dropped to the lowest level since September 2022 at 48.3 (consensus: 50.7) vs. 50.4 in April. The recovery remains fragile, and we expect more stimulus measures in the second half of the year.

POLAND

PLN is underperforming all EMFX. Polish Prime Minister Donald Tusk plans to call a vote of confidence “soon” which could lead to snap general elections. Tusk aims to get a three-fifths majority in the Sejm (lower house) to override a presidential veto and break the legislative deadlock, anticipated to deepen after the election of the nationalist Law & Justice party leader Karol Nawrocki as president.

National Bank of Poland is widely expected to keep rates at 5.25% today. At the last meeting May 7, the bank cut rates 50 bp to 5.25% and pushed back on expectations of an aggressive easing cycle. Governor Glapinski expressed doubts about a cut next month, adding that some MPC members see autumn data as key for more easing. Looking ahead, the swaps market is pricing in 125bps of total easing over the next 12 months, followed by another 50bps over the subsequent 12 months that would see the policy rate bottom between 3.50% and 3.75%.

TURKEY

Turkey inflation cools more than anticipated in May largely due base effect. Headline CPI printed at 35.41% y/y (consensus: 36.00%) vs. 37.86% in April. Core printed at 35.37% y/y vs. 37.12% in April. Headline and core inflation are the lowest since end-2021, leaving room for the central bank to resume easing at its next June 19 policy-setting meeting.

At the last meeting April 17, the central bank hiked rates 350bps to 46.00% and said that “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.” The swaps market is pricing in 11 percentage points of total easing over the next six months.