The dollar is narrowly mixed ahead of the weekend. DXY is trading modestly higher near 97.308 after five straight down days. The euro is trading higher near $1.1710 after making a new cycle high yesterday near $1.1745, while sterling is trading lower near $1.3725 after making a new cycle high yesterday near $1.3770. Further gains are likely for both. Elsewhere, the yen is underperforming after soft Tokyo CPI data (see below), with USD/JPY trading higher near 144.60. While the dollar will see a modest haven bid from time to time given simmering Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold last week. Indeed, some Fed officials are pushing back against Powell already and others are likely to join them in the coming days and weeks. Market repricing of Fed easing along with fading risk off impulses should open up dollar downside again. Likely failure to pass the budget bill by July 4 and the likely inability to strike many major trade deals ahead of the July 9 end of the pause are likely to weigh on the dollar as well.
AMERICAS
Most Fed officials are ruling out a July cut. Collins said “We’re only going to have really one more month of data before the July meeting. I expect to want to see more information than that.” Barkin said "The fog is dense for us too, and there is little upside in heading too quickly in any one direction. Given the strength in today's economy, we have time to track developments patiently and allow the visibility to improve." Daly said “My modal outlook has been for some time that we would begin to be able to adjust the rates in the fall, and I haven’t really changed that view.” Odds of a July cut are around 20%, while a September cut is fully priced in. Looking ahead, the swaps market is pricing in 100 bp of total easing over the next 12 months, and has started to price in 20% odds a fifth cut. Williams, Hammack, and Cook speak today.
May PCE data will be the highlight. Headline is expected to pick up two ticks to 2.3% y/y, while core is expected to pick up a tick to 2.6% y/y. The Cleveland Fed Nowcast model estimates headline and core PCE at 2.3% and 2.6%, respectively. Looking ahead to June, they are estimated at 2.4% and 2.6%, respectively. The rising ISM prices paid readings point to a reacceleration in inflation pressures. Indeed, the FOMC raised the 2025 median estimate for both PCE and core PCE inflation by 0.3 ppt to 3.0% and 3.1%, respectively.
Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.8% in April, while spending is expected at 0.1% m/m vs. 0.2% in April. Real personal spending is expected flat m/m vs. 0.1% in April. The weaker than expected retail sales data for May warn of downside risks to personal spending, which includes services. The Atlanta Fed GDPNow model currently tracks personal consumption spending growth of 1.9% SAAR in Q2 and will be updated today after the data.
The growth outlook is starting to deteriorate. The New York Fed Nowcast model now estimates Q2 growth at 1.9% SAAR vs. 2.3% the previous week and Q3 at 2.1% SAAR vs. 2.5% the previous week. These latest readings aren't bad but are clearly decelerating after weeks of strength. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 3.4% SAAR vs. 3.5% previously. Both models will be updated today.
This deterioration was confirmed by the weak Chicago Fed May National Activity Index. Headline came in at -0.28 vs. -0.13 expected and a revised -0.36 (was -0.25) in April. As a result, the 3-month moving average fell to -0.16 vs. 0.06 in April. This was the lowest since November and moves closer to the -0.7 threshold that typically signals recession.
Q1 GDP data were revised down. The economy contracted -0.5% SAAR vs. -0.2% preliminary. The culprit was weaker personal consumption, which contributed only 0,3 ppt to headline growth vs. 0.8 ppt previously. The downward revision would have been even bigger if not for an improvement in net exports to -4.6 ppt vs. -4.9 ppt previously. Fixed investment, government consumption, and inventories were all unchanged. Private domestic demand rose 1.9% SAAR vs. 2.5% previously. Of note, the Q2 outlook is likely getting worse due to slowing personal consumption as well as a bigger drag from net exports.
Weekly jobless claims confirmed that the labor market is starting to crack. Continuing claims were for the BLS survey week containing the 12th of the month and rose to 1.974 mln, the highest since early November 2021. This suggests people are unable to find work. Elsewhere, initial claims fell to 236k and pushed the 4-week moving average down slightly to 245k vs. 246k last week. This suggests people are still losing jobs. Bloomberg consensus for June NFP is 120k vs. 139k in May, while its whisper number stands at 110k. Given other signs of labor market weakness, we see risks of a sub-100k number next Thursday.
The proposed Section 899 of the OBBBA will be removed following the Treasury Secretary's request. This takes a major weight off the USD, as the so-called “revenge tax” would have deterred foreign investment in US assets at a time when the US faces increasing reliance on foreign capital to finance its widening twin deficits. GOP leaders are racing to have the One Big Beautiful Bill Act (OBBBA) bill on President Trump’s desk by his proposed deadline of July 4. With the Senate still struggling to pass its version of the bill, we simply do not believe a compromise bill can then be approved by both the House and Senate by next Friday.
Canada highlight will be April GDP data. Statistics Canada advance information indicates that real GDP increased 0.1% m/m, while Bloomberg consensus sees flat m/m vs. 0.1% in March. Increases in mining, quarrying, and oil and gas extraction and finance and insurance are projected to partially offset decreases in manufacturing.
Colombia central bank is expected to keep rates steady at 9.25%. However, about a handful of analysts polled by Bloomberg look for a 25 bp cut to 9.0%. At the last meeting April 30, the central bank delivered a dovish surprise and cut rates 25 bp to 9.25% vs. no change expected and said that the cut “maintains a cautious monetary policy stance, while continuing to support the recovery of economic activity without jeopardizing the convergence of inflation to the target.” Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 8.5%.
Banco de Mexico cut rates 50 bp to 8.0% but signaled smaller cuts ahead. The statement noted that “Looking ahead, the Board will assess further adjustments to the reference rate,” but it removed the previous references to additional cuts of “similar magnitudes.” Of note, Deputy Governor Heath dissented in favor of steady rates. Despite the hawkish signal, the swaps market is pricing in 100 bp of further easing that would see the policy rate bottom near 7.0% vs. 7.5% before the decision.
EUROPE/MIDDLE EAST/AFRICA
June eurozone country-level CPI data have started to roll out. France’s EU Harmonised inflation picked up a tick more than expected to 0.8% y/y vs. 0.6% in May, while Spain’s came in as expected and picked up two ticks to 2.2% y/y. Spain is one of the only eurozone countries to report core inflation and it remained steady as expected at 2.2% y/y. Germany and Italy report next Monday. Germany is expected to remain steady at 2.1% y/y and Italy is expected to pick up a tick to 1.8% y/y. Eurozone-wide CPI will be reported next Tuesday. Headline is expected to remain steady at 1.9% y/y and core is expected to remain steady at 2.3% but after today’s readings, we see some upside risks.
ECB officials are becoming more cautious. GC member Knot said “It may well be that the ECB has to hold rates for quite some time to come as long as you don’t know which way these shocks will actually play out on the medium-term outlook.” The odds of a cut at the next meeting July 24 are only around 5%, while the swaps market is pricing in one more 25 bp cut over the next 12 months. Villeroy, Rehn (twice), and Cipollone speak today. Schnabel speaks Saturday.
ASIA
Japan June Tokyo CPI data ran cool. Headline came in two ticks lower than expected at 3.1% y/y vs. 3.4% in May, core (ex-fresh food) came in two ticks lower than expected at 3.1% y/y vs. 3.6% in May, and core ex- energy came in two ticks lower than expected and was steady at 3.3% y/y. The BOJ is placing greater emphasis on CPI ex-food and energy. This measure for Tokyo fell to 1.8% y/y vs. 2.1% in May. At the national level, this measure stands at 1.6% y/y and remains below the 2% target.
Japan also reported soft real sector data. The unemployment rate was steady at 2.5%, but the job-to-applicant ratio fell two ticks to 1.24. Elsewhere, May retail sales came in at -0.2% m/m vs. 0.3% expected and a revised 0.7% (was 0.5%) in April. With the economy slowing and price pressures falling, there is simply no reason for the Bank of Japan to hike again anytime soon. The swaps market still sees only 25 bp of tightening over the next 12 months and so the cautious normalization cycle is an ongoing headwind for JPY.
New Zealand consumer confidence improved in June. The ANZ consumer confidence index rose 5.9 points to a six-month high of 98.8, with all components higher. Specifically, the proportion of households thinking it’s a good time to buy a major household item, the best retail indicator, rose 3 points to -7. The RBNZ easing cycle is nearing an end. Indeed, Governor Hawkesby stressed recently 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 sees 20% odds of a rate cut at the next meeting July 9 as well as 25-50 bp of total easing over the next 12 months that would see the policy rate bottom between 2.75-3.00%.
