Jobs Hold Up, Dollar Doesn’t

US

USD is struggling to gain upside traction despite a resilient US labor market. Non-farm payrolls rose more than expected in May (actual: 139k, consensus: 126k) and the unemployment rate (unchanged at 4.2%) is tracking below the Fed’s 2025 projection of 4.4%. As a result, Fed funds futures trimmed odds of a September cut to 70% from near certainty.

US equity futures are treading water after the main indexes rallied by over 1% on Friday. European equity futures are mixed while stocks in Asia are up. High level trade negotiations between the US and China resume today in London.

In our view, the fundamental backdrop remains difficult for USD for three reasons: (i) the Trump administration implicitly supports a weaker dollar, (ii) the US economy faces stagflation risk, and (iii) confidence in US trade, fiscal, and security policies has taken a big hit.

This week’s Treasury auctions will test appetite for US long-term debt amid growing concerns over the escalating fiscal burden. The US Treasury is set to sell $39 billion of 10-year government bonds on Wednesday and $22 billion of 30-year government bonds on Thursday. In the meantime, 10-year and 30-year Treasury yields are holding around 4.50% and 4.97% since peaking at 4.62% and 5.15% on May 22, respectively.

As a background, the Congressional Budget Office (CBO) estimate US House of Representatives budget bill to add $2.4 trillion to the debt over the next decade, raising the debt-to-GDP ratio from its current level of 97.8% to a record 123.8% - exceeding the CBO’s January baseline forecast of 117.1%.

The May New York Fed inflation expectations is today’s highlight (4:00pm London). In April, one-year ahead inflation expectations were unchanged at 3.6% while three-year-ahead inflation expectations increased 0.2pp to 3.2%, the highest reading since July 2022. In contrast, five-year-ahead inflation expectations decreased -0.2 pp to 2.7%, matching the December 2024 low.

A fresh update of the Atlanta Fed GDPNow model will also be published today. As of June 5, the Atlanta Fed GDPNow model estimates Q2 growth at 3.8% SAAR vs. 4.6% on June 2. The primary driver to Q2 growth is net exports (+2.01pts). This is not indicative of solid economic activity as it largely reflects a tariff-related plunge in imports.

CHINA

USD/CNH is trading heavy just under 7.2000 while China’s stock index is steady within a multi-month range. China remains stuck in deflation. Headline CPI printed at -0.1% y/y (consensus: -0.2%) for a third consecutive month in May. Core CPI picked-up but remains subdued at 0.6% y/y vs. 0.5% the previous two months. Finally, the PPI contraction deepened the most since July 2023 to -3.3% y/y (consensus: -3.2%) vs. -2.7% in April.

China’s trade data continues to point at weak domestic demand activity. The trade surplus rose to $103.22bn (consensus: $101.1) vs. $96.2bn as imports plunged -3.4% y/y (consensus: -0.8%) vs. -0.2% in April. Meanwhile, exports growth slowed more than expected to 4.8% y/y (consensus: 6.0%) vs. 8.1% in April led by a record (excluding the pandemic period) -34% y/y drop in shipments to the US.

Overall, China’s economy is struggling to escape a deflationary spiral in large part because consumption spending is too weak. China's consumption-to-GDP ratio is very low at round 40%, due to high household savings, low household income levels, and high levels of household debt.

NEW ZEALAND

NZD/USD is edging higher on broad USD weakness. RBNZ Chief Economist Paul Conway delivered dovish comments over the weekend. Conway stressed that “underlying inflation continues to ease” and “the labor market’s a bit softer” than the unemployment rate suggests.

Nevertheless, the RBNZ signaled at its last May 28 meeting that the easing cycle is on pause for the time being. Governor Christian Hawkesby stressed 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 20% odds of a July rate cut and 25bps of total easing over the next 12 months for the policy rate to bottom at 3.00%.