US

USD and Treasury yields are holding on to yesterday’s losses triggered by weak US economic data. Fed funds futures jumped from 80% to near certainty for a September cut. The fundamental USD downtrend is intact.

ADP private sector jobs gains in May were disappointing. Employment rose by only 37k (consensus: 114k) vs. 60k in April. This was the lowest job gains since the March 2023 contraction. Following the ADP report, President Donald Trump took the opportunity to once again criticize Fed Chair Jay Powell writing “'Too Late' Powell must now lower the rate. He is unbelievable. Europe has lowered nine times.”

Friday’s May non-farm payrolls (NFP) print will offer a more comprehensive picture of the US labor market. Consensus see job gains of 126k vs. 177k in April. ADP and ISM manufacturing Employment Index suggest risks to NFP gains are skewed to the downside. Meanwhile the employment subindex of the ISM services PMI points to weak job gains. The ISM services Employment Index improved to a 3-month high at 50.7 in May vs. 49.0 in April.

ISM May Services PMI indicates rising risk the US economy enters a period of stagflation. Headline unexpectedly dropped to an 11-month low at 49.9 (consensus: 52.0, prior: 51.6), New Orders plunged to a 29-month low at 46.4 (consensus: 51.6, prior: 52.3), and the Prices Paid increased to a 30-month high at 68.7 (consensus: 65.1, prior: 65.1).

Anecdotal evidence from the Fed June Beige Book shows the US economy is indeed grappling with stagnation and higher prices. The Beige Book points out “that economic activity has declined slightly since the previous report…The outlook, on balance, remains slightly pessimistic and uncertain.” On prices, the Beige Book warns “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.”

May Challenger job cuts and April trade balance are due today. The trade deficit is expected to narrow to -US$66.0bn after widening to a record -US$140.5 in March as firms ramped-up imports to get ahead of tariffs.

A fresh update of the Atlanta Fed GDPNow model will also be published today. As of June 2, the Atlanta Fed GDPNow model estimates Q2 growth at 4.6% SAAR vs. 3.8% on May 30. Fed speakers include: Fed Governor Adriana Kugler, Philadelphia Fed President Patrick Harker (2026 voter), and Kansas City Fed President Jeff Schmid (voter).

10-year Treasury yields unfazed by ballooning federal debt. The Congressional Budget Office estimates the House Republican budget to add $2.4 trillion to the debt over the next decade. Meanwhile, the nonpartisan Tax Foundation projects US tariffs to date would raise $2.0 trillion in revenue over the next decade, enough to offset the debt increase. Bottom line: the chronic US fiscal imbalance appears manageable and unlikely to trigger a destabilizing spike in long-term Treasury yields.

EUROZONE

The ECB is widely expected to cut the policy rate 25bps to 2.00% (8:15am New York, 1:15pm London). President Christine Lagarde’s press conference is 30mins later. The ECB will publish updated macroeconomic projections. At the last April 16-17 policy meeting, the ECB unanimously decided to cut the policy rate by 25bps to 2.25% citing “the disinflation process is well on track” and “the outlook for growth has deteriorated owing to rising trade tensions.”

This time around 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 can 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%.

SWEDEN

USD/SEK is trading heavy on USD weakness. Sweden May inflation remained contained in May and supports the Riksbank’s dovish guidance. The policy relevant CPIF printed at 2.3% y/y (consensus: 2.5%, Riksbank forecast: 2.3%) vs. 2.3% in April and CPIF Ex-energy was 2.5% y/y (consensus: 2.6%, Riskbank forecast: 2.7%) vs. 3.1% in April. The swaps market raised odds of a 25bps cut at the next June 18 meeting to 78% from 65% ahead of the CPI data.

UK

GBP/USD is firm just under key resistance at 1.3600. UK inflation expectations were anchored in May. The BOE’s Decision Maker Panel (DMP) survey showed 1-year expectations dipped to 3.0% (consensus: 3.2%) vs. 3.1% in April and 3-year expectations printed at 2.7% for a second consecutive month. Both series are still above their series lows of 2.5% in October 2024 and will likely keep the Bank of England (BOE) on a cautious easing path.

Indeed, the BOE is expected to pause easing at the next June 19 meeting. Looking ahead, the swaps market continues to imply 60bps of cuts over the next 12 months and the policy rate to bottom between 3.50% and 3.75%.

The Office for National Statistics (ONS) flagged an error to its April CPI report but that won’t shift the dial on BOE rate expectations. According to the ONS, April headline CPI was revised down by 0.1pts to 3.4% y/y, aligning with the BOE’s projection and down from the initial 3.5% print.

JAPAN

JPY is underperforming all major currencies. Japan’s April labor cash earnings report was mixed. Nominal cash earnings were softer than expected at 2.3% y/y (consensus: 2.6%) vs. 2.3% in March but the less volatile scheduled pay growth for full-time workers ran hot at 2.5% y/y (consensus: 2.3%) vs. 2.1% in March.

Regardless, wage growth in Japan is not a source of significant inflation pressures given annual total factor productivity growth of around 1%. As such, the Bank of Japan (BOJ) can afford to be patient with its normalization cycle which is an ongoing headwind for JPY. The swaps market still implies about 50bps of BOJ rate hikes to 1.00% over the next two years.

CHINA

China private sector services activity picked-up in May. The Caixin services PMI increased 0.1pts more than expected to 51.1 vs. 50.7 in April. Nevertheless, the recovery remains fragile, and we expect more stimulus measures in the second half of the year.

Earlier this week, Caixin reported that is manufacturing PMI dropped to the lowest level since September 2022 at 48.3 vs. 50.4 in April. The result is the Caixin composite PMI fell to 49.6 (lowest since December 2022) vs. 51.1 in April.

CANADA

USD/CAD is breaking lower. The downward shift in US rate expectations outweighed the Bank of Canada (BOC) slightly dovish hold. As was largely expected, the BOC left the policy rate at 2.75% for a second consecutive time. The BOC pointed out “there was a clear consensus to hold policy unchanged” while adding that “the Canadian economy is softer but not sharply weaker” and “underlying inflation could be firmer than we thought.”

However, the BOC left the door open for more easing noting: “On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained.”

The next BOC meeting is July 30, alongside the release of its quarterly Monetary Policy Report. There was minimal reaction in the swaps curve after yesterday’s BOC policy decision. The swaps market continues to price in roughly 40% probability of a 25bps cut in July and a total of almost 50bps of easing over the next 12 months. If so, the policy rate would bottom at the lower end of the BOC’s neutral range estimate of between 2.25% to 3.25%.