The dollar is slightly softer ahead of the FOMC decision. Middle East tensions remain elevated. However, there is some hope of a ceasefire as President Trump meets with officials from Pakistan, which has offered to act as a mediator between the US and Iran (see below). Oil prices are flat on the day, equity markets are mixed, UST yields are lower, and gold is lower. DXY is trading lower near 98.67 and remains heavy ahead of the FOMC decision. The euro is trading higher near $1.15 while sterling is trading higher near $1.3445. Elsewhere, USD/JPY is trading lower near 144.85 as the 145 level continues to provide stiff resistance. While the dollar is seeing a modest haven bid from time to time, we believe the fundamental dollar downtrend remains intact. With recent data coming in soft, we expect the Fed to deliver a dovish hold tomorrow (see below). Market repricing Fed easing along with easing tensions with Iran would open up further dollar downside.
AMERICAS
Markets remain jittery. President Trump met with his security team after calling for Iran’s “unconditional surrender.” Elsewhere, reports emerged that Iran was preparing possible missile attacks on U.S. military installations if the U.S. were to take part directly in an offensive campaign. Yet it is unclear just how involved the U.S. wants to be, especially with Israel openly talking about regime change in Iran. Of note, the White House announced that President Trump would meet with Pakistan’s army chief today. Pakistan is a key ally of Iran and has expressed willingness to act as a mediator between the US and Iran. This is a rapidly evolving situation, and markets can turn on a dime after just one headline. Stay tuned.
The two-day FOMC meeting ends today with an expected hold. Given recent inflation data showing little tariff pass-through so far as well as signs of weakening in the labor market, we look for a dovish hold as the Fed prepares the markets for a possible cut in Q3. We expect the statement to soften its previous assessment “that the risks of higher unemployment and higher inflation have risen.” The market sees only 15% odds of July cut, rising to 70% in September and fully priced in for October. We see scope for a jump higher in these odds if we get a dovish hold, and would surely weigh on the dollar.
Chair Powell’s press conference will be key. Powell will likely stick to his familiar script that “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” However, we think it is likely that he will drop some hints that the Fed is feeling more confident that it can cut rates sooner rather than later. Of course, this current spike in oil prices could throw a spanner in the works.
Updated Dot Plots and macro forecasts will also be important. We expect the FOMC median Dots to remain unchanged and show two 25 bp cuts in 2025, which is in line with the pricing from Fed funds futures. However, we see some risks of a hawkish shift in the Dot Plots, as it would take only two officials to move from two cuts to one to get a similar move in the 2025 Dot. Paradoxically, 2025 inflation forecasts could be cut modestly, in line with recent favorable readings. Headline PCE is tracking 0.6 ppt below its 2025 projection of 2.7% while core PCE is tracking 0.3 ppt below its 2025 projection of 2.8%. Of note, the unemployment rate is tracking 0.2 ppt below the 2025 projection of 4.4%.
May retail sales were largely softer. Headline came in three ticks lower than expected at -0.9% m/m vs. a revised -0.1% (was 0.1%) in April, while ex-autos came in five ticks lower than expected at -0.3% m/m vs. a revised flat (was 0.1%) in April. Headline drop was the biggest since January. However, the so-called control group used for GDP calculations came in a tick higher than expected at 0.4% m/m vs. a revised -0.1% (was -0.2%) in April. In y/y terms, headline slowed to 3.3% vs. 5.0% in April and was the slowest since October, ex-autos slowed to 3.5% vs. 4.1% in April and was the slowest since November, and the control group slowed to 5.0% vs. 5.2% in April and was the slowest since January. We know it's only one month but given all the other signs elsewhere, but it appears that the economy is finally showing some cracks.
Weekly jobless claims will be of great interest. That’s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 245k vs. 248k last week, the highest since October 2024. The 4-week moving average of 240k last week was the highest since late August 2023. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. This week, they are expected at 1.941 mln vs. 1.956 mln last week, the highest since mid-November 2021. There is no Bloomberg consensus yet but its whisper number stands at 112k vs. 139k actual in May. As things stand, we could get a sub-100k NFP, which would be the worst monthly reading since October's 44k.
Reports suggest immigration raids will resume. After being paused last week, ICE officials were told this week that agents should resume raids on agriculture, hotels, and restaurants. We believed that last week’s pause was the clearest acknowledgment yet that the deportation program was having a much wider impact on the economy and supported our view that the labor market is starting to crack. By resuming these raids, we believe those cracks will widen further.
The growth outlook remains relatively strong. The Atlanta Fed GDPNow model estimates Q2 growth at 3.5% SAAR and will be updated today after the data. Elsewhere, the New York Fed Nowcast model estimates Q2 growth at 2.3% SAAR and Q3 growth at 2.5% SAAR and will be updated Friday.
April TIC data will be closely watched. The March data showed foreigner investors continued to pile into US securities. However, that was the last month before reciprocal tariffs were announced. The April data are expected to highlight dwindling appetite for US securities given the unusual synchronized decline in the dollar, US stocks and Treasuries that was seen that month.
The Bank of Canada released the account of its June 4 meeting. The account confirmed that two policy options were discussed: maintaining the policy interest rate at 2.75% or reducing it by 25 bp. Ultimately, the bank decided to keep rates at 2.75% because the Canadian economy was softer but not sharply weaker and there was some unexpected firmness in recent inflation data. Officials also agreed there could be a need for a further reduction in rates if the effects of US tariffs and uncertainty continued to spread through the economy and cost pressures on inflation were contained. The next BOC meeting is July 30, alongside the release of its quarterly Monetary Policy Report. The market sees around 25% odds of a cut then as well as 25 bp of total easing over the next 12 months that would see the policy rate bottom at 2.50%. Governor Macklem speaks today.
Brazil COPOM is expected to keep rates steady at 14.75%. However, the market is split. Over a third of the analysts polled by Bloomberg look for a 25 bp hike, while the CDI market sees about 60% odds of a hike. At the last meeting May 7, the central bank hiked rates 50 bp to 14.75% and noted that the easing cycle is in an “advanced stage” and that calibration of monetary policy depends on how inflation behaves. The bank warned that risks to the inflation outlook in both directions are higher than usual. As such, “This scenario prescribes a significantly contractionary monetary policy for a prolonged period to assure the convergence of inflation to the target.” The swaps market is pricing in one more 25 bp cut over the next three months that would see the policy rate top out at 15.0%.
EUROPE/MIDDLE EAST/AFRICA
U.K. inflation remains elevated. Headline CPI came in a tick higher than expected at 3.4% y/y vs. 3.5% in April, core came in as expected at 3.5% y/y vs. 3.8% in April, while CPIH came in a tick higher than expected at 4.0% y/y vs. 4.1% in April. Of note, services CPI came in a tick lower than expected at 4.7% y/y vs. 5.4% in April. For reference, the BOE projected headline CPI at 3.4% y/y and services CPI at 4.7% y/y in May.
The inflation backdrop argues for the BOE to keep rates steady at 4.25% tomorrow. Indeed, the swaps market sees less than 5% odds of a cut. Further out, the market is still pricing in 75 bp of total easing over the next 12 months, with the next cut priced in for September. Nonetheless, a dovish surprise tomorrow cannot be totally ruled out. UK private sector regular pay growth slowed more than anticipated in April and points to further easing in services inflation. Moreover, UK real GDP shrank more than expected in April, driven by a sharp drop in the critical services sector. Indeed, Governor Bailey said after the May 8 meeting that “every meeting is live for us,” adding that he's “very open minded” about a June rate cut.
Riksbank cut rates 25 bp to 2.0%, as expected. It was a dovish cut, as the bank said that “The forecast for the policy rate entails some probability of another cut this year. New information shows that growth in the Swedish economy is weak, at the same time as unemployment remains high.” It stressed that “the economic recovery that began last year has lost momentum, and inflation is expected to be somewhat lower than in the previous forecast.” In its updated rate path forecasts, the Riksbank sees the policy rate at 1.92% by Q4 2025 before bottoming at 1.88% by Q1 2026. This lines up for the most part with the swaps market, which is pricing in 25 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.
ASIA
Japan reported mixed May trade data. Exports came in at -1.7% y/y vs. -3.7% expected and 2.0% in April, while imports came in at -7.7% y/y vs. -5.9% expected and -2.2% in April. Prime Minister Ishiba said “It is important to proceed slowly but surely. I strongly believe that we must not prioritize reaching an early agreement at the expense of our national interests.” Recent comments from Japan officials suggest a trade deal with the US remains elusive. With July Upper House elections looming, we believe Prime Minister Ishiba will be hard-pressed to open up the domestic agricultural and auto markets for fear of losing support for his LDP candidates.
China will lift its limits on foreign investment. Head of SAFE Zhu Hexin said the cap on outflows under the Qualified Domestic Institutional Investors scheme will be raised for the first time since May 2024. No further details were given but the current QDII quota stands at $167.8 bln. It appears that recent yuan strength gave policymakers the opportunity to further liberalize its capital account regulations, albeit modestly.
Bank Indonesia kept rates steady at 5.5%, as expected. Governor Warjiyo said “BI will continue to monitor the scope for reducing the BI rate to support economic growth,” adding that the timing will depend on global conditions and rupiah stability. Indeed, he stressed that “BI is highly committed to maintaining the exchange rate of the rupiah.” Of note, Bloomberg consensus sees a 25 bp cut in H2 and another 25 bp cut in H1 2026 that would see the policy rate bottom near 5.0%.
