US
Encouraging progress over a US-Iran deal has turbocharged the rally in risk assets. Both sides are reportedly nearing an agreement that would extend the ceasefire by 60 days and reopen the Strait of Hormuz. Vice-president JD Vance said the US was “getting very close” to a deal. President Donald Trump has yet to agree to the terms.
Brent crude oil prices dropped 6.5% from yesterday’s high towards $92 a barrel, its lowest level since April 17. The MSCI All Country World Index climbed to an all-time high and US equity futures are a little higher. USD recovered slightly after facing a one-two punch yesterday from improving sentiment tied to the Iran war and mixed US data.
US April PCE inflation backs a more restrictive Fed. PCE matched consensus y/y and was a tick lower than expected m/m. Headline PCE rose 0.4% m/m or 3.8% y/y vs. 0.7% m/m or 3.5% y/y in March. Core PCE increased 0.2% m/m or 3.3% y/y vs. 0.3% m/m or 3.2% y/y in March.
Both headline and core PCE inflation are overshooting the FOMC’s 2026 projection of 2.7%. Moreover, core services less housing PCE printed for a second straight month at 3.5% y/y in April, well above the level consistent with a sustained return to the Fed’s 2.0% target.
However, the Fed funds futures curve was weighed down by declining real personal disposable income. Real disposable income fell -0.5% m/m, biggest monthly contraction since May 2025, vs. -0.2% m/m in March to be down -1.1% y/y, the most since November 2022. That’s an important headwind to consumer spending activity.
The Dallas Fed trimmed mean PCE is another data that supports a dovish Fed narrative. In April, the Dallas Fed trimmed mean PCE dipped to 2.3% y/y vs. 2.4% in March and is well below core PCE of 3.3% y/y. Fed Chair Kevin Warsh said he preferred to follow “trimmed averages” inflation as opposed to core PCE. Indeed, trimmed mean PCE has been shown to outperform core PCE as a gauge of underlying inflation as it’s smoother and less noisy.
Difference between core PCE and trimmed mean PCE: core PCE keeps the standard PCE weighs after excluding food and energy. Trimmed mean PCE reweights the basket every month after trimming away the most extreme price moves on both tails. Specifically, 24% of the weight from the lower tail and 31% of the weight in the upper tail are trimmed. That means the effective weights shifts depending on which categories are excluded.
We are sticking to our view the dollar index (DXY) risk overshooting the upper end of its nearly one year 96.00-100.00 range in the near term. Resilient US economic activity in both absolute and relative terms outweigh the drag to USD from easing geopolitical fears.
The Atlanta Fed GDPNow model real GDP growth estimate for Q2 cooled but continues to point at above-trend growth. GDPNow suggests the US economy will expand at an annualized rate of 3.8% in Q2, down from 4.3% in its previous release on May 21. In parallel, the May PMI data points to a widening US growth edge over peers.
There are no policy-relevant US economic data releases today, just a handful of Fed speakers: Kansas City Fed President Jeffrey Schmid (non-voter), San Francisco Fed President Mary Daly (2027 voter), Fed Vice Chair for Supervision Michelle Bowman, and Philadelphia Fed President Anna Paulson (voter). Overall, the center of gravity on the FOMC has shifted from an easing to a more neutral bias.
NEW ZEALAND
NZD is outperforming across the board and NZD/USD is closing in on key resistance at 0.6000. The ANZ business activity outlook lifted 6 points in May to +25.6, indicative of an ongoing recovery in real GDP growth. Meanwhile, RBNZ Assistant Governor Silk, who voted in favor of keeping rates on hold at 2.25% this week, said all options will be on the table at the next July 8 RBNZ meeting, including a jumbo 50bps hike.
The swaps curve implies 85% odds the RBNZ delivers a first 25bps rate hike in July and a total of 115bps of tightening over the next twelve months. The RBNZ policy path projection is less aggressive and implies 75bps of hikes by Q2 next year.
Bottom line: NZD/USD can lift above 0.6000 if the energy shock continues to fade. But New Zealand’s negative output gap is likely to temper RBNZ tightening bets and limit a more pronounced upswing in NZD.
JAPAN
USD/JPY is directionless above 159.00. Japan's Ministry of Finance purchased a total of ¥11.735 trillion in the period from April 28 through May 27 to stem the surge in USD/JPY. That’s the biggest intervention amount on record and underscores authorities’ determination to keep a lid on USD/JPY around 160.00.
The correction in crude oil prices takes some pressure off JPY and could help nudge USD/JPY lower to 155.00. But breaking materially below that level hinges on the Bank of Japan to lean more hawkish. It’s too soon to bet on that because almost all underlying CPI indicators softened in April.
