With Trump’s bill now headed to the Senate, the fiscal theme is not at all gone

Markets

Yesterday’s House approval of Trump’s multi‐trillion bill wraps up days of suspense going into the vote. The fiscal

theme returned front‐and‐center since the 90‐day US‐Sino trade truce almost two weeks ago. Dire deficit and debt

forecasts by the Committee for a Responsible Federal Budget and weak auctions in the UK, Japan and eventually in

the US ($16bn 20‐yr sale) all added to the negative sentiment and pressured the long end of the curve. The House

vote delivered a final push, lifting the 30‐yr to just 2 bps shy of the 5.17% 2023 high. But without a test, let alone

break, some technical return action kicked in. Net daily changes eventually varied between ‐2.8 (2‐yr) and ‐7.2 (20‐yr)

bps. Stronger‐than‐expected US PMI’s help explain the front‐end’s underperformance. Both the services and

manufacturing gauge rebounded to 52.3, driven by accelerating growth in new orders. Following the tariff pause,

optimism for the year ahead recovered from April’s slump to its highest since January. Input costs rose sharply and

was “overwhelmingly linked to tariffs”. That resulted in the sharpest rise in prices charged since August 2022. The

contrasting mixed‐to‐weak European PMIs triggered some bull steepening and pushed EUR/USD lower, be it only

marginally, to 1.128. EUR/GBP for similar reasons (UK PMIs were slightly less disappointing than the EMU ones)

dipped back towards the 0.84 support area.

Yesterday’s House approval of Trump’s multi‐trillion bill wraps up days of suspense going into the vote.Those business confidence indicators were the only highlight on this week’s economic calendar. The ECB’s wage

negotiations tracker scheduled for release today is worth mentioning but it’s unlikely to alter markets’ 100%

conviction on a 25 bps June rate cut. With Trump’s bill now headed to the Senate, the fiscal theme is not at all gone

but could move a bit to the background in a daily perspective and maybe even give way for the trade topic again (cf.

below). Add to that long weekend ahead in the US (Memorial Day on Monday) and we’re set for a technical trading

session. A weekly close of the 30‐yr north of 5% would be an important signal, suggesting lingering fiscal worries.

EUR/USD already recoups yesterday’s losses to trade around 1.132 but we don’t expect the move to run much

further. UK retail sales for April were much stronger‐than‐expected, even considering the downward revisions for

March. Sterling shrugs though. EUR/GBP holds steady north of 0.841. UK markets are also closed on Monday.

News and views

National inflation in Japan rose slightly more than expected in April. Headline inflation held stable at 3.6% Y/Y. CPI

inflation ex‐fresh food, a measure closely watched by the BOJ, accelerated by from 3.2% to 3.5%. The index is

touching the highest level since January 2023. Inflation ex fresh food and energy also rose from 2.9% to 3.0%. Food

prices, while easing from 7.4% Y/Y in March to 6.4% remain in important source of upward price pressures. Rice

prices even rose 98.4% Y/Y. Prices of utilities also accelerated (3.0% M/M and 8.4% Y/Y) due to the government

phasing out support measures for gas and electricity. Service price inflation remained modest (1.3%), but this due

to changes in education fees. Other topics suggest that private companies might further raise prices. Today’s CPI

release is keeping the door open for the BOJ to continue is normalization process even as it currently has a waitand‐

see bias to assess the impact of US tariffs on price and activity. Next BOJ policy meetings are scheduled on June

17 and July 31. Markets currently see only a very low probability of a next step at these meetings yet.

The Financial Times this morning reports that in the trade negotiations between the US and the EU, the US is urging

the EU to make unilateral tariff concessions referring to people familiar with the discussions. These concessions are

said to be necessary to make progress in talks to avoid additional 20% reciprocal tariffs. The US is said to be unhappy

that the EU only offered mutual tariff reductions rather committing to lower duties alone. The EU apparently also

didn’t give any indication that the digital tax may be discussed, a demand from the US. The US also wants the EU to

reduce regulation and accepting US standards on food and other products, amongst other non‐tariff requests. The

report suggests that talks for now have made little progress in the run‐up to the July 8 deadline when the reduced

reciprocal tariffs expire.

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