US
Markets turned more cautious late yesterday as US and Iran exchanged fire near the Strait of Hormuz. President Donald Trump downplayed the confrontation as a “love tap” and said the ceasefire was still “in effect”. Crude oil prices and USD had a kneejerk uptick before retracing most of their gains.
The US courts have further curtailed the Trump administration’s unilateral tariff power, but not its broader protectionist agenda. The US Court of International Trade ruled yesterday that the temporary (150 days) 10% global tariffs, imposed under Section 122 of the Trade Act of 1974, were illegal.
Regardless, the Section 122 tariffs were set to expire in July, and the administration is already pursuing workaround measures to preserve the broader tariff regime. The US average effective tariff rate currently stands at 11.8%, the highest since the early 1940s but well below the feared 21% peak priced in April 2025.
In our view, the Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That’s pure balance of payments mechanics and is a structural drag on USD.
In the near-term, USD downside is limited largely because the US labor market is stabilizing, keeping odds of Fed funds rate hike in play. Today’s April non-farm payrolls report is expected to validate earlier data pointing to steadier labor demand (1:30pm London, 8:30am New York). Consensus is looking for +65k job gains vs. +178k in March and the unemployment rate is seen unchanged at 4.3% in April, a tick below the FOMC 2026 projection (4.4%).
It’s worth noting that in the three months to March, employers added an average of 68k jobs to payrolls each month. That pace of growth is well within the breakeven range that is necessary to keep the unemployment rate steady given the slowdown in overall labor force growth. A recent Fed research note estimates the breakeven pace of employment growth to average 18k in 2026, substantially lower than at any point in the past 65 years.
May University of Michigan sentiment survey is due later today (3:00pm London, 10:00am New York). Long-term inflation expectations are critical to watch as any drift higher would push the FOMC towards a more hawkish bias. Encouragingly, the New York Fed consumer expectations survey released yesterday showed long-term inflation expectations (3 and 5 years out) remain anchored around their 12-month moving average in April.
UK
GBP is up versus USD and EUR while the gilt market is stable. Early UK local elections results point to a significant blow to the governing Labour party. Labour is on track to lose about three-quarters of its council seats. Reform UK is emerging as the main winner in the local elections, while the Greens gains have been relatively underwhelming.
The results are likely to intensify pressure against Prime Minister Keir Starmer’s leadership. However, the risk the Labour government pivots further leftwards has diminished as the party’s main voter leakage is mostly coming from its right flank. That is supportive for GBP and gilts.
CANADA
Canada April labor force survey is due today (1:30pm London, 8:30am New York). The economy is expected to add +10.0k jobs in April vs. +14.1 in March. Risks are skewed to the upside given the improvement in firms’ hiring intentions. Nonetheless, employment growth has generally been subdued and contracted by an average of -31.5k in the past three months.
The swaps curve has more than fully priced in 50bps of Bank of Canada (BOC) rate hikes in the next twelve months to 2.75%. That looks too aggressive in our view as Canada underlying inflation and long-term inflation expectations remain contained. Moreover, the BOC estimates the output gap over Q1 2026 to be between -1.5% to -0.5% while a range of indicators suggest some slack in the labor market.
Bottom line: the drag to CAD from a possible downward adjustment to the swaps curve is more than offset by the positive terms of trade shock to Canada’s economy from firm crude oil prices.
MEXICO
Mexico’s central bank (Banxico) delivered a final cut and shifted its policy bias to hold. Banxico cut rates 25bps to 6.50% (fully priced-in), taking cumulative easing since the cycle started on March 2024 to 475bps. Importantly, Banxico highlighted “that it will be appropriate to maintain the reference rate at its current level.” The swaps curve implies 50bps of hikes over the next twelve months, underpinning MXN.
