Overview: The breakdown in the US-China trade agreement, the doubling of US steel and aluminum tariffs, and Ukraine's daring drone attack have rattled market, sending stock, bonds, and the dollar lower. All the G10 currencies are up by at least 0.35%, with the Scandis leading the way up by more than 1%. Although the Canadian dollar is the laggard, it is trading at new highs for the year. Most emerging market currencies are higher, as well. Although the Law and Justice presidential candidate in Poland won the run-off, which will challenge Prime Minister Tusk's lead Poland into European leadership, the zloty is up about 0.5% today. Still, it is underperforming other currencies in the region, but the Russian ruble, which is off about 1.6%. The US sees the final May manufacturing PMI, the ISM manufacturing, and April construction spending. However, it is Fed Chair Powell's speech (1 pm EST) that may draw the most interest.
China's mainland markets are closed for a national holiday today as are several smaller bourses, but only South Korea's Kospi among the large markets managed to rise fractionally. Europe's Stoxx 600 is off nearly 0.3% (it rose 4% last month). The US index futures are off 0.5%-0.7%. The S&P 500 rallied a little more than 6% last month, its best since November 2023. The Nasdaq soared by almost 9.6% last month. Meanwhile, 10-year yields are higher. Although the yield on Japan's benchmark edged up to almost 1.50%, the 30- and 40-year yields softened. European 10-year rates are mostly 4-6 bp higher. The 10-year US Treasury yield is four basis points higher to nearly 4.45%. Gold fell 2% last week but is up 1.8% on the day and is straddling the $3350 area. OPEC+ did not announce an increase in July output as much as some feared and tensions with Iran may be rising as the IEA says it has accelerated its near-weapon grade enrichment of uranium. July WTI is near last week's high (~$63).
USD: The dollar is under pressure. The Dollar Index has pushed against last week's low (~98.70), which was also last month's low. The US and China are accusing each other of violating the recent agreement struck in Switzerland and President Trump has doubled the tariff on steel and aluminum to 50%. The PMI and ISM manufacturing surveys today are beside the point. The Federal Reserve will not be persuaded by survey data, and the market has already pushed out the next cut until Q4. The labor market is key, and provided it remains resilient, Fed officials think they have time for the restrictive monetary policy to return inflation to target. This is the message Federal Reserve Chair Powell has delivered before and will likely do so again today when he speaks today (1:00 pm ET). The JOLTS report (April,) tomorrow is expected to show a continued decline in job openings, but its market-impact appears to have weakened in recent months. The nonfarm payroll report is on Friday and the median forecast in Bloomberg's survey is for 125k increase (177k in April). The market will be more sensitive to a rise in the unemployment rate.
EURO: After posting a bullish outside up day and potentially a key reversal last Thursday, the euro consolidated ahead of the weekend. It was unable to re-take the $1.1400 level after setting May's high at the start of last week, near $1.1420. Still, it did so today, rising to almost $1.1440. The final May manufacturing PMI was 49.4, unchanged from the preliminary estimate and confirms the fifth consecutive monthly increase (49.0 in April and 47.3 in May 2024). Still, it has not been above the 50 boom/bust level since June 2022. It does not distract from the ECB meeting on Thursday. The market is confident that the key rates will be reduced by 25 bp, after which the swaps market is pricing in a likely pause until a cut in Q4. Ukraine's daring drone attack on Russia reportedly destroyed at least 40 bombers and other aviation assets that were in the open, which was required by the START treaty that Russia had abrogated a couple years ago. Given the planning of the operation, Ukraine President Zelensky knew about it as he was being dressed down in the Oval Office earlier this year.
CNY: We recognized the price action at the start of last week as the dollar putting a low in place against the offshore yuan near CNH7.1615. The greenback frayed the 20-day moving average (~CNH7.2055) for the second consecutive session ahead of the weekend but has not settled above it for over a month. Today, it reached CNH7.2240, a little shy of the 200-day moving average (~CNH7.2260), while domestic markets are closed for the Dragon Boat Festival. China reported its May PMI over the weekend. With the 90-day lower-tariff agreement with the US, business appears to have picked up, but after a flurry of orders, perhaps led by US retailers, container shipments have already slowed again. The slowing of the manufacturing sector moderated (49.5 vs. 49.0), while the non-manufacturing sector saw a slight increase in activity (50.5 vs. 50.4). The composite edged up to 50.3(from 50.2). The Caixin version is due tomorrow (manufacturing) and Thursday (services and composite).
JPY: The Tokyo CPI report helped the yen extend Thursday's recovery, but the greenback spent most of the pre-weekend session consolidating around the middle of its JPY143.45-JPY144.45 session range. It was knocked back today, despite (or because?) of the jump in US rates. The dollar is pushing lower in Europe and is setting new session lows slightly above JPY142.75. The trendline connecting the April and May lows is near JPY142.35 today and around JPY142.70 at the end of the week. Japan reported Q1 capital spending figures. The estimate for Q1 GDP already included a robust 5.8% annualized increase in private investment. The final May manufacturing PMI at 49.4 was a little above the initial estimate of 49.0. It was the first back-to-back improvement in a year. Still, it has not been above 50 since last May and June's brief visit.
GBP: After setting a three-year high at the start of last week (~$1.3595), sterling consolidated. It is bid today above $1.3550. The next important chart area by be around $1.3640. The UK consumer and mortgage data is of passing interest at best. Nor is the final May manufacturing PMI much of a market-mover. The preliminary estimate of 45.1 was revised to 46.4. It was at 47.0 at the end of 2024 and 51.2 last May. The swaps market has all but ruled out a Bank of England rate cut when it is meeting on June 19. It has one more cut this year fully discounted and a little less than a 50% chance of another. BOE Governor Bailey and three other MPC members speak before parliament tomorrow.
CAD: The firmer than expected Q1 GDP saw the swaps market further downgrade the chances of a rate cut at this week's Bank of Canada meeting. That said, the overshoot of Q1 GDP (2.2% vs. median forecast in Bloomberg's survey of 1.2%) was offset by the downward revision to the growth in Q4 24 (2.1% vs. 2.6% initially reported). Still, the US dollar fell to a three-day low near CAD1.3730 ahead of the weekend. It has been sold to a new low for the year today near CAD1.3675. There is little on the charts ahead of CAD1.3600. The May manufacturing PMI is unlikely to have much impact on the Bank of Canada's rate decision on Wednesday. The swaps market has about a little less than a 25% chance of a cut priced in, while the Bloomberg survey of economists shows the median forecast is for a cut. The higher-than-expected underlying CPI measures is what spurred the swap market reconsideration. The market is pricing in 36 bp of cuts this year, down from a little more than 50 bp at the start of May.
AUD: After recording a new high for the year at the start of last week near $0.6535, the Australian dollar spent the second half of the week in a roughly $0.6400-$0.6460 range. The Aussie averaged $0.6440 in May. It reached almost $0.6490 today. It traded above $0.6500 in four sessions last month, without settling once above it. Australia's manufacturing PMI of 51.7 is among the strongest within the high-income countries but was revised to 51.0 in the final reading today. It has been above 50 consistently this year. It was only above 50 in 2024 in January, and in 2023, only in January and February. This week's focus is the RBA minutes tomorrow, the first estimate of Q1 GDP on Wednesday (~0.4% quarter-over-quarter) and April trade and household spending reports on Thursday.
MXN: The jump in Mexico's April unemployment (2.54% vs. 2.22%), reported at the end of last week was in line with expectations but underscored the weakness of Mexican economy. It saw the dollar continue to trade at somewhat firmer levels. Recall that the low for the year was recorded last Monday near MXN19.1830, but it spent the last three sessions knocking on the 20-day moving average (~MXN19.4230) without poking above it. The broad US dollar weakness has seen it fall back to almost MXN19.33 today. The pre-weekend low was slightly below MXN19.26 and that is the next immediate target. Mexico sees the manufacturing PMI and IMEF surveys today. They are likely to confirm the economic weakness that prompted the central bank to cut its growth forecasts last week. Mexico also reports April worker remittances. They averaged $4.76 bln in Q1 25, slightly more than in Q1 24. The 2024 monthly average was almost $5.4 bln, up from an average nearly $5.3 bln in 2023 and $4.9 bln in 2022. The US budget proposal includes a 3.5% tax on non-citizen offshore transfers. Yesterday, Mexico had judicial elections, with over 3000 candidates competing for about 880 positions. Due to strict rules banning much campaigning, including using public or private funds to buy television or radio advertisements, and disallowing traditional rallies, there is not much information about the candidates.
Reviewed by Marc Chandler
on
June 02, 2025
Rating:
