The dollar remains under pressure as a crucial week begins. DXY traded at a new cycle low near 96.974 earlier before rebounding to trade near 97.208 currently. This week brings a slew of key US data, as well as the Friday deadline for passage of the fiscal bill. The July 9 end of the tariff pause is approaching and should bring lots of trade headlines this week, both good and bad. If nothing else, we should expect heightened volatility across most global markets. The euro is trading flat near $1.1720 after making a new cycle high Friday near $1.1755, while sterling is trading lower near $1.3695 after making a new cycle high Thursday near $1.3770. Further gains are likely for both. Elsewhere, the yen is outperforming despite soft real sector data (see below), with USD/JPY trading lower near 144.20. 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. 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.
AMERICAS
GOP leaders are racing to have the One Big Beautiful Bill Act (OBBBA) bill completed by his Friday deadline. Reports suggest there are eight Republican Senators that have expressed opposition to portions of the bill. With 53 seats, they can only afford to lose three, with Vice President Vance then casting the tie-breaking vote. With the Senate struggling to pass its version of the bill, we believe it will be very difficult to get a compromise bill that can be approved by both the House and Senate by Friday. Of note, the CBO estimates that the current version of Senate bill would add $3.3 trln of budget deficits over the next ten years due to a $4.5 trln decrease in revenue and a $1.2 trln decrease in spending. For comparison, the CBO estimates increased deficits of $2.8 trln for the House bill. Stay tuned.
Tariff noise is likely to pick up this week as the July 9 deadline approaches. Some minor deals may be announced this week, but we do not think any deals with the EU, China, or Japan are likely to be struck. With regards to extending the pause, President Trump said “I don’t think I’ll need to” but then added “I could, no big deal.” He also said “I’d like to make it shorter. I’d like to just send letters out to everybody, ‘Congratulations, you’re paying 25%.’” Another round of arbitrarily high tariffs probably would not be taken well by the markets. On the other hand, an extension would be very much welcomed by the markets.
Even higher tariffs would keep the Fed cautious. Yale’s non-partisan Budget Lab policy research center estimates that the 2025 tariffs in place through June 16 would bring the overall US average effective tariff rate up to 15.8%, the highest since 1936. No wonder most Fed officials appear to be ruling out a July cut. Barring a total collapse in the economy, we concur. Odds of a July cut are around 20% while a cut is fully priced in for September. Looking ahead, the swaps market is now pricing in 100 bp of total easing over the next 12 months, with 50% odds of a fifth 25 bp cut. This likely reflects expectations that Powell’s replacement will be much more dovish. Bostic and Goolsbee speak today.
June Chicago PMI will be reported. Headline is expected at 42.9 vs. 40.5 in May. However, this series has had little correlation with the national PMI readings for several years. Dallas Fed manufacturing survey will also be reported and is expected at -12.0 vs. -15.3 in May. ISM manufacturing PMI will be reported tomorrow, with headline expected to pick up two ticks to 48.7. Keep an eye on prices paid, which is expected to rise a tick to 69.5. The regional Fed ISM manufacturing prints suggest risks are skewed to the upside. Of note, the US S&P Global manufacturing PMI was unchanged in June at 52.0, a four-month high. ISM services PMI will be reported Thursday, with headline expected at 50.6 vs. 49.9 in May. The regional Fed ISM services prints suggest risks are skewed to the upside. Of note, the S&P Global services PMI dipped in June to a two-month low at 53.1 vs. 53.7 in May.
The growth outlook is deteriorating. The New York Fed Nowcast model now estimates Q2 growth at 1.7% SAAR vs. 1.9% the previous week and Q3 at 1.9% SAAR vs. 2.1% the previous week. These latest readings still aren't bad but they are clearly decelerating after weeks of ongoing strength. They will be updated Friday. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 2.9% SAAR vs. 3.4% previously. It will be updated tomorrow after the data.
Canada and the US have agreed to resume trade negotiations. The reported aim is to have a deal done by July 21. On Friday, President Donald Trump said he was ending all trade discussions with Canada, in retaliation to Canada’s digital services tax (DST) which was due to start today. On Sunday, Canada announced the collection of the DST will be halted, and legislation will be brought forward to rescind the Digital Services Tax Act. USD/CAD has retraced all of Friday’s overshoot.
EUROPE/MIDDLE EAST/AFRICA
The ECB published the review of its 2021 monetary policy strategy. (i) The symmetric 2% inflation target over the medium term was reaffirmed, (ii) Symmetry requires appropriately forceful or persistent policy response to large, sustained deviations of inflation from target in either direction, (iii) All monetary policy tools currently available to the Governing Council will remain in its toolkit, and (iv) Risks and uncertainty to the outlook will be addressed with the appropriate use of scenarios and sensitivity analyses. President Lagarde wrote in a statement that “This assessment was a valuable opportunity to challenge our thinking, check our policy toolkit and fine-tune our strategy. It provides us with an even stronger basis to conduct monetary policy and fulfill our mandate of price stability in an increasingly uncertain environment.” She and Chief Economist Lane will make the formal presentation of the findings shortly.
Eurozone June CPI data continue to roll out. Italy’s EU Harmonised inflation came in a tick lower than expected and remained steady at 1.7% y/y. Germany reports later today and is expected to pick up a tick 2.2% y/y. German state CPI data already reported today point to some slight downside risks to the national reading. Eurozone-wide CPI data will be reported tomorrow. Headline CPI inflation is expected to pick up a tick to 2.0% y/y and core CPI inflation is expected to remain steady at 2.3% y/y. Both are currently around the 2% target. However, services inflation (3.2% y/y in May) still has some distance to travel to make sure that inflation stabilizes at the target on a sustainable basis. Bottom line: the ECB is nearly done easing. The swaps market implies one 25 bp rate cut over the next 12 months that would see the policy rate bottom at 1.75%.
ASIA
Japan reported weak May real sector data. IP came in at 0.5% m/m vs. 3.5% expected and -1.1% in April, while the y/y rate came in at -1.8% vs. 1.6% expected and 0.5% in April. This was the weakest y/y rate in December. Elsewhere, housing starts plunged -34.4% y/y vs. -14.6% expected and -26.6% in April. Last week, retail sales came in a bit weaker than expected. We expect the economy to continue slowing, which should keep the Bank of Japan very cautious. The swaps market continues to price in only 25 bp of total tightening over the next 12 months.
New Zealand ANZ business outlook firmed up in June. Business confidence increased 9.7 points to a 2-month high of 46.3 and expected own activity rose 6.1 points to a 2-month high of 40.9. However, reported past activity (the best GDP indicator) fell 3 points to 2. The RBNZ easing cycle has likely come to a halt, underpinning NZD. 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 implies 16% odds of a rate cut at the next July 9 meeting and 33bps of total easing over the next 12 months for the policy rate to bottom between 2.75-3.00%.
China reported solid official June PMIs. Manufacturing came in a tick higher than expected at 49.7 vs. 49.5 in May, non-manufacturing came in two ticks higher than expected to at 50.5 vs. 50.3 in May, and the composite rose three ticks to 50.7. This was the highest composite reading since March. Caixin reports manufacturing PMI tomorrow and is expected at 49.3 vs. 48.3 in May. Services and composite PMIs will be reported Thursday, with services expected to fall two ticks to 50.9. China’s economic recovery remains fragile, and we expect more stimulus measures in the second half of the year.
