Highway to Debt
US
USD pared back most of yesterday’s gains. The loss of confidence in US policies, reflected by the divergence in the dollar and interest rate differentials, continue to weigh on USD.
Investors’ concern over the escalating US fiscal burden is slowly building. The term premium on 10-year Treasuries rose to 90bps the highest since mid-2014. The non-partisan Committee for a Responsible Federal Budget estimates that the House of Representatives’ reconciliation bill – titled the One Big Beautiful Bill Act (OBBBA)– would add $3.1 trillion to the debt including interest by the end of 2034 and raise the debt-to-GDP ratio 25pts to a record 125%.
Another issue is that the growth tailwind from the bill will likely be offset by higher tariffs. The Tax Foundation estimates that the OBBBA would increase GDP by 0.6% while the US imposed tariffs before retaliation would lower GDP by 0.6% over the next decade.
US private sector activity expands more than anticipated in May and argues for an extended Fed pause. The composite PMI rose to a 2-month high at 52.1 (consensus: 50.3) vs. 50.6 in April driven by a growth pick-up in the services and manufacturing sectors. Meanwhile, the average prices charged for goods and services surged in in May to the highest since August 2022 which is indicative of rising inflation pressures. Fed funds futures imply 80% odds that the next 25bps cut will be at the September 17 FOMC meeting.
The Fed’s independence remains shielded for now. The US Supreme Court has allowed the dismissals of members of the National Labor Relations Board and the Merit Systems Protection Board, but signaled its ruling does not apply to the Federal Reserve Board.
There were no tweaks to the language on currency policy in the G7 finance ministers and central bank governors communique. The statement noted again “We reaffirm our May 2017 exchange rate commitments” but emphasized the “need to address excessive imbalances and strengthen macro fundamental.”
In his earlier incarnation as investment strategist, the Chair of the White House Council of Economic Advisers Stephen Miran wrote that “the root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade.” Bottom line: the Trump administration implicitly welcomes a weaker dollar.
Second-tier US economic data are due today. April new home sales and May Kansas City Fed services activity. Fed speakers include: Chicago Fed President Austan Goolsbee (voter), St. Louis Fed President Alberto Musalem (voter), Kansas City Fed President Jeff Schmid (voter), and Fed Governor Lisa Cook.
EUROZONE
EUR/USD is firmer above 1.1300. The ECB Account of the April 16-17 policy meeting paves the way for further EUR/USD gains. ECB officials generally welcome the recent appreciation in the euro.
According to the Account: “a possible structural increase in international demand for the euro, while entailing downside risks to inflation, was also a symptom of a largely positive development, namely a shift into European assets. A portfolio shift could lower long-term interest rates in the euro area and lead to cheaper financing for planned investment projects. Finally, the appreciation of the euro would further reduce the price of energy imports in euro terms, which could counterbalance some of the negative effects of the tariffs and the exchange rate on energy-intensive exporters.”
The ECB Q1 negotiated wages indicator is up next (10:00am London). 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. Bottom line: the Eurozone disinflation process remains well on track and the ECB has room to deliver the 50bps of cuts priced-in by the one-year swaps curve.
UK
GBP/USD is breaking higher. UK retail sales soar in April and argues for a more cautious Bank of England. Total retail sales volumes increased 1.2% m/m (consensus: 0.3%) vs. 0.1% in March (revised down from 0.4%). Sales volumes rose across most sectors, with volumes only falling in clothing and other non-food stores.
The Bank of England expects modest consumption growth of 0.2% q/q in Q2 supported by positive real wage growth. But higher household savings means spending activity will likely remain subdued. Aggregate household saving ratio rose to 11.6% in 2024 Q4, the highest level since the pandemic.
CANADA
USD/CAD is heavy near 1.3800 on broad USD weakness. Canada March retail sales is due today (1:30pm London). 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.
JAPAN
USD/JPY is under downside pressure around 143.50. Japan April CPI was mixed. Headline and core ex. fresh food were 0.1pts higher than expected at 3.6% y/y (prior: 3.6%) and 3.5% (prior: 3.2%), respectively. Core ex. fresh food & energy matched consensus at 3.0% y/y vs. 2.9% in March.
For reference, the BOJ projects core CPI ex. fresh food and core CPI ex. fresh food & energy to average 2.2% and 2.3% in fiscal 2025, respectively. The swaps market ignored the data and still implies 50bps of BOJ rate hikes to 1.00% over the next two years.
NEW ZEALAND
NZD/USD recovered above 0.5900. New Zealand retail sales activity unexpectedly pick-up in Q1. The total volume of retail sales increased 0.8% q/q (consensus: 0%) vs. 1.0% in Q4. Motor vehicle retailing, and pharmaceutical and other store-based retailing saw the largest increases in Q1.
Regardless, the RBNZ is widely expected to cut the Official Cash Rate (OCR) by 25bps to 3.25% next week. At its April 8 meeting, the RBNZ cut the OCR by 25bps to 3.50% and noted it “has scope to lower the OCR further as appropriate”.
