The dollar bounce is running out of steam. DXY is trading flat near 99.533 as the short-covering peters out. Kiwi is outperforming after the hawkish cut from the RBNZ (see below). USD/JPY is trading lower near 144.15 as yields rose after a weak 40-year JGB auction (see below). Elsewhere, the euro is trading higher near $1.1340 as Chief Economist Lane signals limited room for further easing (see below), while sterling is trading flat near $1.3510. We continue to view any dollar relief rallies with skepticism, which today’s price action would seem to confirm. Easing trade tensions remove a significant headwind on the dollar over the short-term, but those tensions are likely to pick up over the next couple of weeks as new (and higher) tariffs are announced. Uncertainty remains high as tariffs are sometimes quickly reversed, as we saw this past weekend with the EU. US policymaking credibility is taking a big hit and that along with a weaker growth outlook argues for a weaker dollar.
AMERICAS
FOMC minutes will be the highlight. At that meeting, the FOMC voted unanimously to leave the target range for the funds rate unchanged at 4.25-4.50%. The statement stressed that “Uncertainty about the economic outlook has increased further” and “the risks of higher unemployment and higher inflation have risen.” Meanwhile, Chair Powell reiterated that “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” There were no updated macro forecasts or Dot Plots, as the next Summary of Economic Projections are due at the June 17-18 meeting. Kashkari speaks today. The odds of a June cut have fallen to 5%, around 25% in July, and less than 75% in September. Looking ahead, the swaps market is still pricing in around 75 bp of total easing over the next 12 month, down from 125 priced in earlier this month.
Consumer confidence rebounded in May. Conference Board ‘s headline measure rose jumped to 98.0 vs. 87.1 expected and a revised 85.7 (was 76.0) in April. However, it’s still down nearly 15 points from the November high of 112.80. Regardless, the sentiment readings no longer appear to be a reliable indicator of future spending behavior. Less impressive is that the labor index (jobs plentiful minus jobs hard to get) fell to an 8-month low of 13.2 vs. 13.7 in April, indicative of weakening labor market conditions. University of Michigan reports its final May consumer sentiment Friday.
The Q2 outlook remains solid. The Atlanta Fed GDPNow model now has Q2 growth at 2.2% SAAR and will be updated Friday after the data. Elsewhere, the New York Fed Nowcast model has Q2 at 2.4% SAAR and will also be updated Friday. Its initial Q3 estimate should also come Friday. Bottom line: the economy remains on solid footing but the impact of the tariffs hasn't fully hit yet.
Banco de Mexico releases its quarterly inflation report. It then releases its minutes tomorrow. At that May 15 meeting, the bank cut rates 50 bp for the third straight meeting to 8.5% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and so the bank seems determined to continue cutting rates despite upside risks to inflation. Since then, mid-May inflation came in higher than expected at 4.22% y/y. Next policy meeting is June 26 and another 50 bp cut to 8.0% seems likely. Looking ahead, the swaps market is pricing in nearly 125 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank officials are trying to manage easing expectations. Chief Economist Lane said the ECB is unlikely to lower its policy rate (currently at 2.25%) below 1.50%. According to Lane, “Rates below 1.5% are clearly accommodative. Going there would only be appropriate in the event of more substantial downside risks to inflation, or a more significant slowdown in the economy. I do not see that at the moment.” The swaps market agrees and is pricing in the policy rate to bottom between 1.50-1.75% over the next 12 months.
ECB reported April inflation expectations. 1-year expectations came in at 3.1% vs. 2.8% and 2.9% in March. This was the second straight rise to the highest since February 2024. However, longer-term expectations were better behaved as 3-year expectations remained steady as expected at 2.5% and 5-year expectations were unchanged for the fifth consecutive month at 2.1%. The ECB has room to deliver more easing as longer-term inflation expectations remain well anchored around 2%.
Riksbank published its semi-annual Financial Stability report. It warned that the risk of financial instability has increased, reflecting high political uncertainty abroad. However, Sweden is fundamentally in a good position to handle the turbulence “partly thanks to our low government debt and well-capitalized banks.”
ASIA
Long-term JGB yields rose after the 40-year bond auction saw weak demand. The bid-to-cover ratio was 2.21, the weakest since July. As a result, 40-year JGBs underperformed across the curve. The recent rise in long-term JGB yields is pushing up Japan’s debt servicing costs, limiting the Bank of Japan’s tightening capacity which is a headwind for JPY. USD/JPY is trading in a tight range around 144.50. In the short term, the build-up of stale long JPY positions increases the risk of a sharper short-covering move higher in USD/JPY.
Bank of Japan Governor Ueda acknowledged the risks of rising long-term rates. He noted that “If super long-term interest rates fluctuate significantly, we will keep in mind the possibility that such fluctuations could affect long-term or even short-to-medium-term interest rates.” Ueda pledged to monitor that potential impact, and comes a day after reports that the Finance Ministry could cut its sales of long-term bonds in favor of shorter-term ones.
Australia April CPI data ran a little hot. Headline came in a tick higher than expected and was steady at 2.4% y/y, while core picked up a tick to 2.8% y/y. It’s worth noting that the RBA focuses on the quarterly CPI data because it’s less volatile and captures more items than the monthly CPI indicator. At its last May 20 meeting, the RBA cut rates 25 bp to 3.85% and stressed that “Inflation is in the target band [2-3%] and upside risks appear to have diminished.” Indeed, the RBA projects the policy relevant trimmed mean inflation remaining at 2.6% (down from 2.7% previously) across its forecast horizon through 2027. Next meeting is July 8 and the market sees nearly 60% odds of another cut, while the swaps market continues to price in a total 75 bp of easing over the next 12 months.
Reserve Bank of New Zealand cut rates 25 bp to 3.25%, as expected. The RBNZ’s updated rate path was tweaked lower to imply nearly 50 bp of additional easing. The RBNZ now projects the OCR to bottom at 2.85% in Q1 2026 vs. 3.10% previously. However, the RBNZ signaled that the bar for more cuts is high, which underpinned NZD and New Zealand yields. First, the RBNZ noted that “inflation is within the target band.” Second, the RBNZ scrapped previous guidance that it “has scope to lower the OCR further as appropriate.” Third, the RBNZ discussed the option of keeping the OCR on hold at 3.50% and voted 5-to-1 in favor of a 25 bp cut. Fourth, Chief Economist Conway pointed out that the OCR is now close to its neutral level, which the RBNZ estimates to be between 2-4%. The swaps market is pricing in 50 bp of easing over the next six months that would see the policy rate bottom near 2.75%.
