The dollar is stabilizing ahead of ADP. DXY is trading modestly higher near 96.90 after trading at a new cycle low yesterday near 96.377. The euro is trading lower near $1.1775 after making a new cycle high yesterday near $1.1830 as more ECB officials are talking about the exchange rate (see below). Elsewhere, sterling is trading lower near $1.3700 after making a new cycle high yesterday near $1.3790. Further gains are likely for both after this period of profit-taking ends. The yen is underperforming after Trump threatens 30-35% tariffs (see below), with USD/JPY trading higher near 144. While the dollar is enjoying a small bounce today, 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. Trump jawboning the Fed won’t help matters as Fed independence remains a concern. Market repricing of Fed easing along with fading risk off impulses should keep the dollar under pressure.
AMERICAS
The Senate narrowly passed its version of the fiscal bill. Three Republicans (Collins of Maine, Tillis of North Carolina, and Paul of Kentucky) opposed the bill, and so the 50-50 tie required Vice President Vance to cast the tie-breaking vote. Of note, the CBO estimates that the Senate bill would add $3.3 trln to the 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 deficits to increase $2.8 trln for the House bill. For now, markets do not seem to care that the U.S. fiscal outlook remains on a unsustainable trajectory.
The Senate bill now goes to the House, where it is sure to face some opposition. As things stand, Speaker of the House Johnson can only afford to lose three Republicans if all members are present and voting. Some are already voicing opposition to the changes made by the Senate, with reports of up to 20 tilting towards a no vote unless changes are made. Of course, any changes made in the House now would require the Senate to take up the bill again. Stay tuned. While a compromise should eventually pass, it seems unlikely to happen before the July 4 deadline.
Chair Powell has stayed on message. At the Sintra conference yesterday, he stressed that “In effect, we went on hold when we saw the size of the tariffs and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs.” Powell added that “We think that the prudent thing to do is to wait and learn more and see what those effects might be. We’re watching. We expect to see over the summer some higher readings.” With regards to policy, Powell was open-minded and said “We are going meeting by meeting. I wouldn’t take any meeting off the table or put it directly on the table. It’s going to depend on how the data evolve.”
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 60% odds of a fifth 25 bp cut. This likely reflects expectations that Powell’s replacement will be more dovish.
ADP reports its private sector jobs estimate. It is expected at 98k vs. 37k in May, and comes ahead of the June jobs report tomorrow. Bloomberg consensus for June NFP is 110k vs. 139k in May, while its whisper number stands at 100k. For reference, NFP gains averaged 149k per month over the past twelve months while the breakeven pace of job gains needed to keep the unemployment rate stable is between 80k and 100k. We see risks of a sub-100k print after continuing jobless claims rose to the highest level since early November 2021. The unemployment rate is expected to rise a tick to 4.3%, while average hourly earnings are expected to fall a tick to 3.8% y/y.
June ISM manufacturing PMI was firm. Headline came in two ticks higher than expected at 49.0 vs. 48.5 in May. Employment fell to 45.0 vs. 47.1 expected and 46.8 in May and new orders fell to 46.4 vs. 48.1 expected and 47.6 in May. Both were the lowest since March. Prices paid came in two ticks higher than expected at 69.7 vs. 69.4 in May. While the headline was good, the details continue to point to risks of stagflation, which is a drag for USD. ISM services PMI will be reported tomorrow, with headline expected at 50.7 vs. 49.9 in May. Here, prices paid are expected to fall a tick to 68.6 but we see upside risks.
May JOLTS data were firm. Job openings came in at 7769k vs. 7330k expected and a revised 7395k (was 7391k) in April. The job openings rate rose two ticks to 4.6%, the highest since January and back above the 4.5% threshold that typically signals a sharp rise in the unemployment rate. The unemployment-to-job opening ratio dipped to 0.9 from 1.0 in May. Moreover, there is no layoff spiral underway as the layoffs rate fell a tick to 1.0% and remains within the same narrow range in place since 2021.
June Challenger job cuts will be reported today. After spiking to a post-pandemic high of 275k in March, layoffs have since fallen to 94k in May.
The growth outlook is deteriorating. The Atlanta Fed GDPNow model now estimates Q2 growth at 2.5% SAAR vs. 2.9% previously. The slowdown is being driven in large part by weaker personal consumption, which the model now estimates at 1.5% SAAR vs. 1.7% previously. This will be updated tomorrow after the data. Elsewhere, 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. This will also be updated tomorrow. All these latest readings aren't bad but are clearly decelerating after weeks of strength.
June Canada PMIs start rolling out. S&P Global manufacturing PMI will be reported today, while its services and composite PMIs will be reported Friday. Ivey PMI will be reported next Tuesday. All the May readings were in contractionary territory for the economy, and are likely to remain there in June.
EUROPE/MIDDLE EAST/AFRICA
Other ECB officials are talking about the euro. GC member Kazaks said “The exchange rate has moved significantly this year and this will also weigh on inflation. If the euro was to significantly appreciate further, this would weigh down on inflation and exports, which could tilt the balance toward another cut.” Elsewhere, Chief Economist Lane noted “that There is some rebalancing by European investors especially - but also global investors - toward the euro. What we’ve seen so far looks durable, but of course we are very curious to see what happens next.” These comments come after Vice President Guindos noted that $1.20 would not be an issue but that “Something beyond that would be much more complicated.” We believe the ECB is more concerned about the pace of appreciation than about the level. Guindos, Cipollone, Lane, and Lagarde speak today.
We get some Bank of England speakers today. Governor Bailey and MPC member Taylor are on a panel in Sintra. Ahead of the panel, Taylor burnished his dovish credentials by noting that “After some shocks and noise clouded my view of the economy and global developments in the first quarter, my reading of the deteriorating outlook suggested to me that we needed to be on a lower rate path, needing five cuts in 2025 rather than the market-implied quarterly pace of four.” Recall that he, Dhingra, and Ramsden dissented in June in favor of a 25 bp cut. The swaps market sees nearly 90% odds of a cut at the next meeting August 7 and is pricing in 75 bp of total easing over the next 12 months.
National Bank of Poland is expected to keep rates steady at 5.25%. Governor Glapinski holds his post-decision press conference tomorrow. Minutes of the June 4 meeting will be published Friday. At the last June 4 meeting, the bank delivered a hawkish hold as Governor Glapinski dropped previous guidance of more easing in the autumn. Instead Glapinski stressed “We are not announcing any path for interest rates.” The swaps market is pricing in 100 bp of total easing over the next 12 months, followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom near 3.75%.
ASIA
President Trump admitted that a trade deal with Japan was unlikely. As such, he said Japan should pay a tariff of “30%, 35% or whatever the number is that we determine, because we also have a very big trade deficit with Japan.” Of note, the reciprocal tariff on Japan announced on Liberation Day was 24%. With Upper House elections in Japan next month, we think it's highly unlikely that Prime Minister Ishiba would make any concessions to Trump now, especially with regards to US demands that Japan open up its domestic rice market. We were pretty sure that Japan, China, and the EU would stand firm but recent comments out of Europe suggest that they are about to fold like a cheap suit. This stands in stark contrast to Japan and China.
BOJ Governor Ueda remains cautious. Yesterday, he said the bank is still monitoring the impact of tariffs as well as the outlook for underlying inflation before making any policy decisions. Ueda noted that “Headline inflation is above 2%, underlying inflation is below 2% - I want both to convert to the 2% by the time I leave my office” in April 2028. 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.
