Change at the helm of the Fed?
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Market update
The S&P 500 closed the week at 6,173.07, +3.44% higher. The Dow Jones closed at 43,819.27, +3.82%, with the Nasdaq higher by +4.25%. The volatility index VIX closed the week at 16.32, down from 20.62. The Euro Stoxx 600 rose +1.32%.
The 10-year UST closed at 4.28%, down from 4.38% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -3bps. US Corporate Bond spreads: Investment Grade spreads widened +2bps at 91bps and High Yield spreads narrowed -4bps at 249bps. German 10-year Bunds yield closed at 2.59% up from 2.52% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 104bps and High Yield narrowed -2bps at 337bps.
The US Dollar Index (DXY) depreciated -1.32% last week and closed at 97.40. The Euro closed at 1.1718 (+1.69%); the Yen appreciated +0.99%, closing at 144.65 and the Swiss Franc appreciated +2.30%, closing at 0.7990. Gold closed at $3,274.33, depreciating -2.79%. Oil was lower, Brent closed at $67.77 (-12.00%) and WTI at $65.52 (-12.56%).
Macroeconomy
The Fed
The administration is considering nominating Chair Powell’s replacement in Sept./Oct., earlier than usual. Front runners include Kevin Warsh, Kevin Hassett, Chris Waller, David Malpass, and Scott Bessent. Fed independence is under attack, but monetary policy is set by a committee, not one individual. Monetary policy is set by the FOMC, which is made up of twelve people: the seven members of the Fed’s Board of Governors, the president of the NY Fed, and an annually rotating group of four of the 11 remaining regional reserve bank presidents. Governors are appointed by the president of the U.S. and approved by the Senate. Presidents are appointed by their local boards of directors (with Board of Governors approval), whereas the Chair has one vote out of 12, and can be overruled by the rest of the committee. Governor Waller and Bowman, both President Trump appointees, have tried to make the July FOMC meeting live by talking about “good” rate cut if inflation doesn’t accelerate. There will be one more CPI report before the July FOMC meeting and investors do not expect the majority of the committee to be voting for a cut.
Fedspeak
Fed Chair Powell spoke in front of the House and Senate. He reiterated his message from last week’s FOMC press conference that they were “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” Looking forward, he also said that the tariff inflation would be evident in the June and July numbers, so that implicitly leant in favor of waiting until September before any further rate cuts. In terms of tariffs, Powell mentioned the uncertainty around this, saying that in terms of who’ll pay for the tariffs, “it’s very hard to predict that in advance”. Other Fed speakers struck a mostly patient tone, with Richmond Fed’s Barkin saying that he does “believe we will see pressure on prices”, San Francisco Fed’s Daly expected that “we would begin to be able to adjust the rates in the fall”, while Boston Fed’s Collins expected at least one cut this year but indicated that July would be too early. Cleveland Fed’s President Hammack also said that it “may well be the case that policy remains on hold for quite some time”. She also said that “I would rather be slow and move in the right direction than move quickly in the wrong one”. NY Fed’s Williams comments were similar to Powell’s with him saying that it was "entirely appropriate" to maintain the current policy stance and that it was still “early days” in terms of the impact of tariffs on inflation. Fed Governor Barr also struck a “wait and see” tone, noting the potential for “some inflation persistence” due to second-round effects. On a different tone, Michelle Bowman, the Fed’s Vice Chair for Supervision commented how inflation had come in at or beneath expectations recently, and said “we should recognize that inflation appears to be on a sustained path toward 2 percent and that there will likely be only minimal impacts on overall core PCE inflation from changes to trade policy.” As such, she said that she would support a rate cut as soon as the next meeting in late July, if “inflation pressures remain contained”.
Tariffs
We are roughly a week away from the July 9th reciprocal tariff extension deadline. On Friday, the US announced that they were stopping trade talks with Canada in retaliation for their digital service taxes and that new tariffs would be launched within a week. However, overnight Canada has dropped this tax to enable talks to restart. Last week, Lutnick said that an agreement with China has now been agreed and that imminent plans have been made to agree deals with ten of its major trading partners. European Commission President von der Leyen revealed that the EU was assessing the latest counter-offer proposed by the US, saying “we are ready for a deal. At the same time, we are preparing for the possibility that no satisfactory agreement is reached”. There have been some tensions over the EU’s approach to the talks, with Germany’s Chancellor Merz earlier calling the Commission’s negotiating strategy “far too complicated” as he favored a “quick and simple” deal. Meanwhile, France’s Macron said that he would settle for 10% tariffs from the US but that this would result in the same levy being applied to US goods.
NATO
At the NATO summit, allies agreed a new NATO defense-expenditure target of 5.0 % of GDP by 2035, split into at (1) 3.5% for core defense spending (up from the earlier 2% target) and (2) up to 1.5% for defense- and security-related spending. Allies will submit an annual progress report on their defense expenditures. To accommodate Spain’s reservations about the 5% target, the press statement’s wording was amended from “All allies commit to invest 5% of GDP in defense” to “Allies reached a decision to invest 5% of GDP in defense”.
Germany
The German cabinet has passed the second draft of the 2025 budget and the headline figures of the medium-term fiscal plan for 2026–2029. The details confirm that the fiscal package agreed upon a few months ago represents a paradigm shift. Net borrowing at the federal level is expected to surge from €51bn (~1.2% of GDP) in 2024 to €143bn in 2025 (~3.3% of GDP), before rising to over €170bn in 2026–2027. The German government aims to increase defense spending to 3.5% of GDP by 2029. Infrastructure investment is also accelerating, with €37bn from the special fund set to be deployed in 2025. The deployment of this effort is slightly more frontloaded than we initially anticipated and will help to offset part of the negative impact stemming from trade policy uncertainty.
US data
Flash US PMIs for June came in better than expected (52.8 vs. 52.2). On jobs, lower weekly initial jobless claims (falling from 243k to 236k vs. 243k estimates) but higher continuing claims (+1,974k vs +1,950k estimates). US May goods exports also fell -5.2% m-o-m, while revised estimates for Q1 GDP showed the economy contracted by -0.5% (vs. previous -0.2% estimates). That included worse-than-expected consumption, which grew by +0.5% annualized (vs. +1.2% prev.), its slowest quarterly pace since the 2020 pandemic shock. However, May durable goods data was strong at +16.4% vs +8.5% estimates due to bumper aircraft orders, but even ex-transport it came in half a percent higher than expected at +0.5%.
Europe data
Euro area composite PMI held steady at 50.2 in June, according to the flash estimate. Services activity improved slightly (+0.3pt to 50.0), offset by a small decline in manufacturing output (-0.5pt to 51.0). Country-wise, sentiment improved somewhat in Germany but deteriorated in France. Overall, the PMIs suggest a resilient economy in the face of the trade war shock. Following strong Q1 GDP growth (driven by Irish pharma exports to the US), we expect some payback in Q2, with GDP growth close to 0.0% q-o-q.
Japan funding
A summary of opinions from the BOJ’s latest policy meeting suggested that some policymakers supported maintaining steady rates amid uncertainty regarding the effects of US tariffs on Japan’s economy. Some board members observed stronger-than-expected inflation, with one member proposing that the central bank may need to raise rates decisively despite the prevailing economic uncertainty. At the same time, demand for Japan's 20-year bond auction was marginally below the average of the past year, despite the government's adjustments to its borrowing strategy - the bid-to-cover ratio came in at 3.11. The sale came after the Finance Ministry approved a plan to reduce the volume of 20-, 30- and 40-year bonds sold in regular auctions by a total of ¥3.2 trillion ($22Bn) until the end of March 2026. In response to the reduction in long-term funding, the ministry plans to enhance the issuance of shorter-term securities, which will include 2-year notes and six-month Treasury bills. These changes will be evident starting from the auctions next month.
Asia data
Japan: The Jibun manufacturing PMI rose to 50.4 in June, its first positive reading since May 2024, up from 49.4 in May. The services PMI improved to 51.5 from 51.0, and the composite PMI climbed to 51.4, the highest since February. Tokyo’s CPI increased by +3.1% y-o-y in June, down from +3.4% in May, raising doubts about a BOJ rate hike in July. Core CPI eased to +3.1% y-o-y from +3.3%. Unemployment remained steady at 2.5% in May for the third consecutive month. Retail sales grew +2.2% y-o-y in May, slowing from +3.5% in April and missing the +2.5% forecast. Industrial output disappointed with a +0.5% m-o-m rise, far below the expected +3.4%, as gains in machinery and autos were offset by declines in five categories, led by non-auto transport equipment. China: Manufacturing contracted for a third straight month in June, with the official PMI edging up to 49.7 (49.6 expected) from 49.5 in May. The non-manufacturing PMI rose to 50.5, beating expectations of 50.3, pushing the composite PMI to 50.7 from 50.4. Industrial profits fell -9.1% y-o-y in May, the steepest drop since October, reversing earlier gains and bringing the year-to-date decline to -1.1%. The economy continues to face US tariffs and deflationary pressures. Australia: The S&P Global composite PMI rose to 51.2 in June from 50.5, with services climbing to 51.3 from 50.6, while manufacturing held steady at 51.0. Headline CPI inflation slowed to +2.1% y-o-y in May, the weakest pace in seven months, down from +2.4% in April and below the +2.3% forecast. Trimmed mean CPI eased to +2.4% y-o-y from +2.8%, its lowest since November 2021.
Highlights
On rates
Sovereign yields moved in the opposite direction on the two sides of the Atlantic. In the US, Treasury yields moved lower on the back of declining oil prices and dovish comments from Fed officials. Notably, Fed Vice Chair for Supervision Michelle Bowman said she believed the likelihood of a July rate cut to be as high as 25%. The 2yr fell -16.0bps to 3.75%, its lowest since early April and the 10yr yield ended the week at 4.28%, down -9.9bps. Fed expectations shifted in a dovish direction, with the market pricing in 64bps worth of incremental cuts this year (up +12.7bps on the week). The odds of a July cut stand at around 20%, with most assuming the next move will arrive in September. Market pricing for the Fed’s terminal rate has fallen to 3.1%. Over in Europe, 10yr bund yields rose +7.4bps to 2.59% as the German government announced a massive increase in net borrowing to levels not seen since the Covid-19 pandemic. Meanwhile, Spain opted out of the 5% of GDP defense spending commitment and hopes for more joint EU debt issuance meant periphery spreads stayed at tight levels given that these countries have less fiscal room. The 10yr BTP-bund spread fell to its lowest level since 2015 at 898 bps, while spreads with Spain and France ended the week at 59 and 69bps respectively.
Earnings
For Q2 2025, earnings of the S&P 500 are expected to grow 5.0% y-o-y, which would be the lowest earnings growth since Q4 2023. Revenues are estimated to grow 4.2% y-o-y, down slightly from the 4.7% forecasted on 03/31. Looking at sectors, from the 11 sectors of the S&P 500, 10 are projected to report y-o-y sales growth, led by Information Technology. The Energy sector is the only sector predicted to report negative y-o-y revenues growth. Overall, 110 companies have issued EPS guidance. 59 of them issued negative EPS guidance and the remaining 51 issued positive guidance. Several companies have already reported their earnings. Major releases included Nike which posted results that weren’t as bad as feared (sales down -5% vs. the -6.7% expected), Micron which reported strong upside on EPS (1.91 vs. consensus of 1.60) with the beat driven by healthy revenue and better margins, and FedEx which beat on EPS but missed on sales and provided underwhelming guidance
What to watch
- Monday: China June official PMIs; Japan May industrial production, housing starts; Eurozone May M3; Germany June CPI, May retail sales, import price index; Italy June CPI; US June MNI Chicago PMI, Dallas Fed manufacturing activity
- Tuesday: China June Caixin manufacturing PMI; Japan Q2 Tankan survey, June consumer confidence index; Eurozone June CPI; Germany June unemployment; US June ISM index, Dallas Fed services activity, Total vehicle sales, May JOLTS report
- Wednesday: Japan June monetary base; Eurozone May unemployment rate; Canada June manufacturing PMI; US June ADP report
- Thursday: China June Caixin services PMI; Switzerland June CPI; US June jobs report, ISM services, May trade balance, factory orders, initial jobless claims
- Friday: Japan May household spending; Eurozone May PPI; Germany June construction PMI, May factory orders; US Independence Day