The dollar was broadly stronger against the majors last week. NOK, AUD, and GBP outperformed while EUR, CHF, and SEK underperformed. However, the dollar’s surge at the start of the week due to the US-China trade truce gave way to steady losses as the euphoria wore off. Indeed, reports suggest that the U.S. does not have the manpower to negotiate many trade deals and so will instead set tariff rates over the next 2-3 weeks. This ongoing tariff uncertainty coupled with the Moody’s downgrade Friday are likely to lead to further dollar losses this week.

AMERICAS

Moody’s cut the U.S. rating a notch to Aa1 from Aaa late Friday afternoon. The agency cited the increase in government debt as well as a higher interest burden and noted “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.” The move should not be too surprising after Moody’s cut the outlook on its Aaa rating to negative back in November 2023. S&P was the first to move the U.S. below AAA back in August 2011, while Fitch followed suit back in August 2023.

The market reaction to the S&P downgrade on August 5, 2011 was significant. On August 8, 2011, the first trading day after the downgrade, the S&P 500 plunged nearly 7% while Treasury yields paradoxically fell on safe haven demand and USD ticked up. In contrast, the market reaction to Fitch Ratings’ downgrade on August 1, 2023 was muted. One reason is that post-2011, most institutional investors had shifted away from requiring only AAA-rated debt in their investment mandate.

Following Moody’s downgrade, 10-year Treasury yields rose by nearly 5 bp to 4.49%. Further yield upside seems limited, however, as investors remain largely unfazed by the chronic US fiscal imbalance. Indeed, the Congressional Budget Office (CBO) projects the federal debt to balloon from currently 98% of GDP to a record high of 155% of GDP in 2055. However, foreign holdings of US Treasuries surged to an all-time high of $7.63 trln in March even as the compensation investors require for holding long-dated Treasuries (the term premium) remains historically low. However, US trade policy uncertainty, doubts about the rule of law, escalating fiscal burden, and interference with the Fed’s independence threaten to make the U.S. a less attractive place to invest.

The Atlanta Fed’s financial markets conference will be held this week and features numerous Fed speakers. Bostic (twice), Jefferson, Williams, Logan, and Kashkari speak Monday. Bostic, Barkin, Collins, Musalem, Kugler, Hammack, and Daly speak Tuesday. Barkin and Bowman speak Wednesday. Williams speaks Thursday. Musalem, Schmid, and Cook speak Friday. All are expected to maintain the cautious stance set forth by Powell. The odds of a June cut have fallen below 10%, are around 35% in July, and are less than 90% in September. Looking ahead, the swaps market is pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.

S&P Global preliminary May PMIs Thursday will be the data highlight. Manufacturing is expected at 49.9 vs. 50.2 in April, services is expected at 51.0 vs. 50.8 in April, and the composite is expected at 50.3 vs. 50.6 in April. If so, the composite would be the lowest since September 2023. ISM PMIs will be reported the first week of June.

Chicago Fed reports its April National Activity Index Thursday. Headline is expected at -0.22 vs. -0.03 in March. If so, the 3-month moving average would rise to 0.00 vs. -0.01 in March and would move further above the -0.7 threshold that typically signals recession.

The Q2 growth outlook is solid. The Atlanta Fed GDPNow model now has Q2 growth at 2.4% SAAR and is right back at its initial estimate. It will be updated next Tuesday May 27 after the data. Elsewhere, the New York Fed Nowcast model now has Q2 at 2.3% SAAR and will be updated Friday, while its initial Q3 estimate will come at the end of May.

Weekly jobless claims Thursday will be of interest. That’s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 230k vs. 229k the previous week. There is no Bloomberg consensus yet for May NFP but its whisper number stands at 150k vs. 177k reported for April. Continuing claims are reported with a 1-week lag and are expected at 1.884 mln vs. 1.881 mln the previous week.

Canada highlight will be April CPI data Tuesday. Headline is expected at 1.6% y/y vs. 2.3% in March, while core median is expected to remain steady at 2.9% y/y and core trim is expected to remain steady at 2.8% y/y. The Bank of Canada projects headline inflation to average 1.5% over Q2 under both of its scenario analysis. Recall that under scenario one, GDP stalls briefly in Q2 due to trade policy uncertainty. This scenario assumes that most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Under scenario two, GDP contracts over the next year due to tariffs and the adverse effects of uncertainty. This scenario assumes a long-lasting global trade war unfolds.

Canada also reports March retail sales data Friday. Statistics Canada advance estimate indicates retail sales increased 0.7% m/m in March vs. -0.4% in February. The pick-up will likely reflect a surge in motor vehicle sales in anticipation of higher import duties. Indeed, sales ex-auto are expected at -0.3% m/m vs. 0.5% in February.

EUROPE/MIDDLE EAST/AFRICA

The UK-EU summit takes place Monday. This is the first leader level post-Brexit summit and is expected to focus on defense and resetting post-Brexit relations. Closer UK-EU trade relations can lead to a more favorable UK business investment outlook, which bodes well for GBP.

European Central Bank publishes the account of its April meeting Thursday. At that meeting, the ECB cut rates as expected by 25 bp to 2.25%. The tone of the monetary policy statement was dovish, as the ECB reiterated that “the disinflation process is well on track” but warned that “the outlook for growth has deteriorated owing to rising trade tensions.” The ECB also removed from the statement the sentence that “Monetary policy is becoming meaningfully less restrictive.” President Lagarde explained that assessment of the restrictiveness was “meaningless at this point in time” because the neutral rate is no longer reliable in a shock-prone world. Finally, Lagarde confirmed that the decision to cut rates by 25 bp was unanimous and no one argued in favor of a 50 bp.

There will be plenty of ECB speakers this week. Muller speaks Monday. Wunsch, Knot, and Cipollone speak Tuesday. Guindos, Centeno, Lane, and Escriva speak Wednesday. Holzmann, Vujcic, Nagel, Elderson, Guindos, and Escriva speak Thursday. Lane speaks Friday. A cut at the next meeting June 5 is nearly priced in, while the swaps market is pricing in about 50 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.

Eurozone highlight will be preliminary May PMIs Thursday. Headline manufacturing is expected at 49.3 vs. 49.0 in April, services is expected at 50.5 vs. 50.1 in April, and the composite is expected at 50.8 vs. 50.4 in April. If so, this would nearly reverse last month’s drop in the composite. Looking at the country breakdown, the German composite is expected at 50.4 vs. 50.1 while the French composite is expected at 48.2 vs 47.8 in April. Italy and Spain will be reported with the final May readings in early June.

ECB reports its Q1 negotiated wages indicator Friday. In Q4, the negotiated wages indicator eased to 4.13% y/y vs. a multi-decade high of 5.53% in Q3. The ECB’s forward-looking wage tracker points to a sharper slowdown in eurozone wage pressures. The wage tracker with unsmoothed one-off payments indicates an average negotiated wage growth of 2.5% y/y in Q1 or 2.8% y/y over 2025.

U.K highlight will be April CPI data Wednesday. Headline is expected at 3.3% y/y vs. 2.6% in March, core is expected at 3.6% y/y vs. 3.4% in March, and CPIH is expected at 3.9% y/y vs. 3.4% in March. The expected acceleration is due largely to higher energy and water bills as well as the impact of employer National Insurance Contributions. Of note, services CPI is expected at 4.9% y/y vs. 4.7% in March. For reference, the BOE projects headline CPI at 3.4% y/y and services CPI at 5.0% y/y in April.

There are several Bank of England speakers this week. Chief Economist Pill speaks Tuesday. Breeden, Dhingra, and Pill speak Thursday. Odds of a 25 bp cut in June are around 10%, while the swaps market is pricing in around 50 bp of total easing over the next 12 months.

U.K. preliminary May PMIs Thursday will also be important. Manufacturing is expected at 46.0 vs. 45.4 in April, services is expected at 50.0 vs. 49.0 in April, and the composite is expected at 49.3 vs. 48.5 in April. If so, the composite would remain below the 50 boom/bust level for the second straight month.

U.K. April retail sales data will be reported Friday. Headline is expected at 0.4% m/m vs. 0.4% in March, while ex-auto fuel is expected at 0.2% m/m vs. 0.5% in March. The Bank of England expects modest consumption growth of 0.2% q/q in Q2, supported by positive real wage growth. However, higher household savings means spending activity will likely remain subdued. Aggregate household savings ratio rose to 11.6% in 2024 Q4, the highest level since the pandemic.

ASIA

Japan highlight will be April national CPI data Friday. Headline is expected to fall a tick to 3.5% y/y, core is expected at 3.4% y/y vs. 3.2% in March, and core ex-energy is expected at 3.0% y/y vs. 2.9% in March. If so, core would be the highest since April 2023 and would move further above the 2% target. The Bank of Japan cut its core inflation forecast for FY25 to 2.2% in May vs. 2.4% in January and cut its FY26 forecast to 1.7% in May vs. 2.0% in January. These forecasts seem to low in light of the recent acceleration, but perhaps the expected slowdown in growth will temper inflation in the coming months.

Bank of Japan officials remain cautious. Board member Noguchi speaks Thursday. The BOJ is still seen on hold through 2025. Looking ahead, the swaps market is pricing in 25 bp of tightening over the next 12 months.

Preliminary May PMIs Thursday will also be important. The composite PMI rebounded in April but is likely to come under downward pressure again.

Reserve Bank of Australia meets Tuesday and is expected to cut rates 25 bp to 3.85%. However, we expect the RBA to signal that the bar for more easing is high because of Australia’s strong labor market and sticky underlying inflation. The RBA will publish new sets of economic forecasts in the Statement on Monetary Policy.

Australia data highlight will be preliminary May PMIs Thursday. The composite PMI slipped in April and is likely to remain under downward pressure.

New Zealand highlight will be Q1 real retail sales data Friday. Retail sales ex-inflation is projected at 0.0% q/q vs. 0.9% in Q4. The ANZ consumer confidence survey showed that the proportion of households thinking it’s a good time to buy a major household item, the best retail indicator, rose 5 points in April. However at -11, it’s still at a level consistent with subdued consumer spending activity.