Risk Sentiment Sours

US

As was widely expected, the FOMC voted unanimously to keep the Fed funds target rate unchanged at 4.25-4.50%. But Fed Chair Jay Powell struck a more hawkish tone than we anticipated. First, Powell reiterated that the Fed is well positioned to wait for greater clarity before considering any adjustments to the policy stance. Second, Powell warned “We expect a meaningful amount of inflation to arrive in the coming months.” Indeed, the 2025 FOMC median projections for PCE and core PCE inflation were revised materially higher (see table below).

The 2025 median Fed funds rate projection was unchanged and still implies 50bps of easing. However, the distribution of dots reveals a more cautious tone with a growing number of officials (7 vs. 4 in March) now projecting no change in rates this year.

The US April TIC flows confirmed dwindling appetite for US securities. Net foreign purchases of long-term US securities fell by -$50.6bn in April, the most in five years. The drop was driven by private foreign investors net selling of US Treasury bonds & notes (-$46.8bn vs. 82.3bn in March) and net selling of US equities by foreign official institutions (-$33.2bn vs. -0.1 in March).

On a 12-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to a six-month low of $1160.3bn in April vs. $1283bn in March. There’s plenty more room for foreign investors to reduce their still-sizable exposure to US securities which is a structural drag for USD. Effort to narrow the US trade deficit mean fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

UK

GBP/USD is trading heavy near key support at 1.3400. Bank of England is widely expected to keep rates steady at 4.25% (12:00pm London). However, a dovish surprise cannot be ruled out which can undermine GBP. UK private sector regular pay growth slowed more than anticipated in April and points to further easing in services inflation. Moreover, UK real GDP shrank more than expected in April, driven by a sharp drop in the critical services sector.

Attention will be on the MPC vote split. At the last May 8 meeting, the MPC voted by a 5-4 majority to trim the policy rate by 25bps to 4.25%. Two members preferred to reduce the Bank Rate by 50bps (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill).

Taylor and Dhingra should back a 25bps cut in June while Mann and Pill will likely vote again to stand pat. This leaves 3 swing votes to decide the policy outcome. Interestingly, BOE Governor Andrew Bailey said after the May 8 meeting “every meeting is live for us” adding that he's “very open minded” about a June rate cut. Looking ahead, the swaps market sees 75bps of total easing over the next 12 months.

SWITZERLAND

The Swiss National Bank (SNB) cut the policy rate 25bps to 0.00%. CHF rallied as the swaps markets unwound the 25% odds the SNB would deliver a larger 50bps cut. The SNB’s benign inflation forecast (table below) leaves room for more easing. The swaps market implies another 25bps cut in the next 12 months and the policy rate to bottom at -0.25%. Regardless, CHF safe haven status outweighs the drag from the likelihood of negative rates.

NORWAY

USD/NOK is firmer above key resistance at 10.0000 on broad USD strength. The Norges Bank is expected to keep the policy rate steady at 4.50% (9:00am London). The swaps market price-in just 7% odds of a cut. At the last May 8 policy meeting, the Norges Bank kept the policy rate steady at 4.50% and stressed that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” In March, the Norges bank’s forecast implied one 25bps cut to 4.00% by year-end and the policy rate to bottom at 3.00% by end-2028. The June Monetary Policy Report will offer a fresh batch of macroeconomic forecasts.

The Norges Bank can afford to be patient before starting to cut rates. Inflation is persistently above the 2% target and the Norges Bank’s Regional Network contacts expect growth to remain firm in Q2 and Q3. The swaps market is pricing in 100bps of cuts over the next two years that would see the policy rate bottom at 3.50%.

AUSTRALIA

AUD/USD is down near the lower-end of this month’s 0.6440-0.6550 range. Australia’s May labor force report was soft. The economy unexpectedly lost -2.5k jobs (consensus: +21.2) after adding 87.6k in April. The details were not that bad. Full-time jobs increased 38.7k vs. 58.6k in April while part-time jobs fell -41.1k vs. 29k in April. The unemployment rate was unchanged at 4.1% for a fifth consecutive month and is tracking below the RBA’s June 4.2% projection.

Leading indicators point to a weaker labor market. The NAB Employment subindex plunged to 0.4 (the lowest since January 2022) vs. 3.6 in April. Moreover, the Westpac-Melbourne Institute Unemployment Expectations subindex rose 5% to 127.4 in June, implying consumers expect unemployment to rise over the year ahead.

Bottom line: the RBA has room to deliver more rate cuts. RBA cash rate futures imply 78% odds of a 25bps cut to 3.60% at the July 8 meeting and a total of between 75bps and 100bps of easing over the next 12 months.

NEW ZEALAND

NZD is underperforming across the board. Financing New Zealand’s large current account deficit (-5.7% of GDP in Q1) is more difficult during periods of global risk aversion when foreign capital flows tend to dry up.

New Zealand Q1 GDP growth overshot expectations. Real GDP increased 0.8% q/q vs. 0.5% in Q4. Consensus had 0.7% penciled-in while the RBNZ’s GDP model implied growth of 0.6%. Growth in Q1 was driven by business services and manufacturing.

The improvement in New Zealand economic activity supports the RBNZ’s stance that the easing cycle is on hold. Governor Christian 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 17% odds of a rate cut at the next July 9 meeting and 25bps of total easing over the next 12 months for the policy rate to bottom at 3.00%.

TURKEY

Turkey central bank is expected to keep rates steady at 46.00% (12:00pm London). At the last meeting April 17, the central bank hiked rates 350 bp to 46.0% and said that “Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.” Next meeting is June 19 and with the lira still under pressure, we lean towards a hold but acknowledge risks of a dovish surprise. However, the decision then will depend on both internal and external developments over the next couple of weeks. The swaps market is pricing in 11 percentage points of total easing over the next six months.