"Mr Late" better be on time today with the highlight of the ECB’s Sintra event
|Markets
The US dollar capped the first half of 2025 with the weakest performance YtD since 1973 and new multiyear low. The trade‐weighted index closed at 96.88, the weakest level since February 2022. EUR/USD rose for an eighth day straight with the pair now testing the upper bound of the upward sloping trend channel near the 1.18 big figure. USD/JPY technical looks a bit less disastrous but the duo weakened yesterday nonetheless to 144.03. GBP isn’t in the best shape either – EUR/GBP shot up to 0.858 yesterday – but still outperformed the dollar. Cable returned the very recent highs north of 1.37. We’ve seen no particular trigger for yesterday’s dollar weakness. It’s simply the result of ongoing overall (US) policy uncertainty, an unsustainable fiscal path and the prospect of (aggressive) Fed cuts later this year. Touching on these individually, we’ve seen some positive noises coming one the trade front regarding the likes of the EU – which according to Bloomberg yesterday said it would accept a 10% universal tariff in return for exemptions on key sectors such as pharma and semiconductors. A potential (framework of a) deal is beneficial for the currency involved in the first place, in this case the euro, despite the amount of details that would still needed to be worked out afterwards. Japan is on the other side of the spectrum with president Trump lashing out at the country and threatening to send it a letter with a unilaterally set import tariff rate. In terms of unsustainable public finances, the Senate is in the process of voting on dozens of amendments to the $3.3tn deficit‐raising BBB that eventually culminate in a final up‐or‐down vote on the bill. The latter is expected for this afternoon. Increasing bets for Fed rate cuts, finally, have also weighed on the dollar recently. Since Powell’s subtle tweak before Congress last week, markets are eager to spot any speck of weakness in economic data. That’s how they’ll look at this week’s releases as well, starting today with the US manufacturing ISM and JOLTS job openings. It makes both the dollar and US yields vulnerable for further losses. The latter dropped another 2.8‐6.1 bps in a bull flattener. We’re wary for the long end of the curve though, with the mega bill underway. It’s what we see in Europe as well, where the long end started underperforming the front particularly in the wake of Merz’ fiscal whatever it takes early March and yesterday again (Germany +3 bps in the 30‐yr). US President Trump meanwhile send a letter to Fed chair Powell, listing all the countries with lower policy rates than the US and insisting on him to lower rates. “Jerome ‐ You are, as usual, “Too Late”. You have cost the USA a fortune and continue to do so. You should lower The Rate – by a lot! Hundreds of Billions of Dollars Being lost! No Inflation.” Mr Late better be on time today with the highlight of the ECB’s Sintra event: a panel chat that includes ECB’s Lagarde, BoE’s Bailey, BoJ’s Ueda and himself.
News and views
The quarterly Tankan confidence survey of the Bank of Japan indicates that activity remains quite resilient despite overall uncertainty, in particular on trade. The headline large manufacturing index improved from 12 in Q1 to 13 in Q2. A similar index of the non‐manufacturing sector eased slightly from 35 to 34, but both indices printed stronger than expected. Companies are turning a bit less confident on the upcoming quarter (12 & 27 respectively) but the also these measures remained stronger than expected. Big companies (both sectors combined) expect capital investment to rise by 11.5% fiscal year 2025. Japanese firms expect CPI inflation to stay above the 2% target both short‐term and longer term (1‐y 2.4%, 3‐y ahead 2.4% and 5‐y ahead 2.3%). While the BoJ recently turned a bit more cautious on the timing of further easing, today’s survey at least suggests the debate on the timing/pace of further policy normalization is here to stay and might become again more concrete when uncertainty on trade eases later this year. The yen strengthens modestly this morning, with USD/JPY drifting below the 144 big figure (143.65).
According to the price measure from the UK retail industry group BRC, shop prices accelerated in June from ‐0.1% Y/Y to 0.4% Y/Y. It was the first positive reading since July of last year. The rise was mainly driven by a further substantial monthly rise in food prices (0.7% M/M from 0.4% in May) raising the Y/Y measure from 2.8% to 3.7%. The rise in non‐food shop prices remained more modest at 0.1% M/M keeping this measure in negative territory Y/Y (‐1.2% from 1.5%). BRC comments that “Within three months of the costs imposed by last Autumn’s Budget kicking in, headline shop prices have returned to inflation for the first time in close to a year. Food inflation showed little sign of slowing down, particularly in fresh produce, where prices of meat have been impacted by high wholesale prices and more expensive labour costs”.
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