The dollar is trading flat despite the potential end of US tariffs. DXY initially surged to 100.481 on the court ruling that the bulk of tariffs were illegal (see below) but has since drifted lower to trade flat near 99.918. With a period of tariff uncertainty likely, markets are taking the path of least resistance and selling the dollar anew. USD/JPY is trading slightly higher near 145. Elsewhere, the euro is trading flat near $1.1290 while sterling is trading flat near $1.3480. We continue to view any dollar relief rallies with skepticism, which today’s price action would seem to confirm. Easing trade tensions remove a significant headwind on the dollar over the short-term, but the fate of the tariffs won’t be known for some time yet as we expect the Trump administration to seek out other legal means to enact them. Uncertainty will remain high but when all is said and done, US policymaking credibility is taking a big hit and that along with a weaker growth outlook argues for a weaker dollar.
AMERICAS
The bulk of President Trump’s tariffs have been ruled illegal by a federal court. A panel of three judges at the U.S. Court of International Trade found that the use of the International Emergency Economic Powers Act to enact reciprocal and punitive tariffs was illegal, and gave the administration ten days to remove them. Of note, tariffs on steel, aluminum, and autos that were imposed under different powers (Section 232 and Section 301) were left in place. The Justice Department has already filed an appeal, and it may ultimately end up in the Supreme Court. While the potential end of the tariffs should be seen as a positive development for the global economic outlook, there is still great uncertainty about how this eventually resolves. The Trump administration is likely to seek alternative legal justification for tariffs or may engage with Congress. Under the US constitution, Congress has the power to set tariffs.
The ruling is seen as a significant check on executive power in trade policy. It is also fueling a broad rally in risk assets and rising yields as global recession risks ebb. Of note, the dollar’s initial gains have been pared back significantly and the greenback is almost back to where it was before the court ruling. This response likely reflects ongoing market unease with the chaotic and unpredictable US trade policy. In the absence of a definitive outcome as well protracted uncertainty regarding the tariffs, we believe markets will simply revert to form and continue selling the dollar.
FOMC minutes set the Fed up for an extended pause. Minutes showed that “Participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity.” In addition, “Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.” Importantly, “The staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.”
The Fed is keenly aware of the potential loss of confidence in the US. The minutes show that “Some participants commented on a change from the typical pattern of correlations across asset prices during the first half of April, with longer-term Treasury yields rising and the dollar depreciating despite the decline in the prices of equities and other risky assets. These participants noted that a durable shift in such correlations or a diminution of the perceived safe-haven status of U.S. assets could have long-lasting implications for the economy.” We concur. Barkin, Goolsbee, Kugler, Daly, and Logan speak today. The odds of a June cut have fallen below 5%, around 20% in July, 65% in September, and fully priced in for October. Looking ahead, the swaps market is still pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.
We get our first revisions to Q1 GDP data. Growth is expected to remain unchanged from the initial estimate of -0.3% SAAR. However, this is old news as markets look ahead to Q2 and Q3. The Atlanta Fed GDPNow model has Q2 growth at 2.2% SAAR while the New York Fed Nowcast model has it at 2.4% SAAR. Both will be updated tomorrow.
Banco de Mexico releases its minutes. At that May 15 meeting, the bank cut rates 50 bp for the third straight meeting to 8.5% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and so the bank seems determined to continue cutting rates despite upside risks to inflation. Since then, mid-May inflation came in higher than expected at 4.22% y/y. Next policy meeting is June 26 and another 50 bp cut to 8.0% seems likely. Looking ahead, the swaps market is pricing in nearly 125 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.
EUROPE/MIDDLE EAST/AFRICA
The UK plans to require its pension funds to invest in private markets and the domestic economy. Specifically, the Treasury said that the government “will take a reserve power in the pension schemes bill to set binding asset allocation targets” for investments in private markets and also will earmark GBP27.5 bln from defined-benefit programs for public employees for “local investment priorities.” We suspect there will be a lot of pushback, and rightfully so. Indeed, we can’t think of a better recipe for disaster as asset allocation is simply not a role that the government should take on. Never mind that private markets are by definition opaque and untested by a prolonged period of financial instability.
South African Reserve Bank is expected to cut rates 25 bp to 7.25%. A few analysts polled by Bloomberg look for steady rates. At the last policy meeting March 20, the bank kept rates steady at 7.5%. Governor Kganyago said “The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable. Globally we do not know where policy will end up.” Its model showed the policy rate at 7.25% for end-2025 and 7.21% for end-2026, which is slightly higher than market pricing for the policy rate bottoming near 7.0% over the next six months.
ASIA
Australia Q1 capex survey was weak. Private capex fell -0.1% q/q vs. 0.5% expected and a revised 0.2% (was -0.2%) in Q4. The drop was driven by a -1.3% q/q decline in equipment, plant, and machinery. Encouragingly, the second estimate for planned capex for 2025-26 was up 6.7% from the first estimate to AUD95.6 bln. The market continues to price in a total 75 bp of easing over the next 12 months.
The ANZ New Zealand May business outlook survey was soft. Business confidence fell 12.7 points to a 10-month low of 36.6 in May, expected own activity fell 12.9 points to a 10-month low of 34.8, and reported past activity (the best GDP indicator) fell 6 points to 5. Yesterday, the RBNZ cut rates 25 bp to 3.25% but signaled that the bar for more easing is high. In fact, Governor Hawkesby stressed overnight 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 is pricing in 33% odds of a July cut that becomes fully priced in for October. Despite some growing signs of weakness in the economy, that cut is seen as the last one in this cycle.
Bank of Korea cut rates 25 bp to 2.5%, as expected. The bank noted that “The domestic economy is expected to see a marked slowdown in growth this year, even as inflation remains on a stable trajectory. Uncertainty surrounding the future growth path also remains elevated.” Governor Rhee said the bank would consider more rate cuts if the 2025 growth outlook falls more, adding that four of the six members of the board were open to a cut over the next three months. Rhee also said there is a chance of larger cuts in the future. The swaps market is pricing in 25-50 bp of total easing over the next 12 months that would see the policy rate bottom between 2.0-2.25%.
