Markets

One way to put it is saying that you are prepared to roll the date forward for countries/blocs which are negotiating in good faith. US Treasury Secretary Bessent framed it like this when asked about the approaching end date (July 8) to the 90-day pause for reciprocal tariffs on all countries expect China (early August deadline) in the House Ways and Means Committee. It’s the positive reading of the current trade truce. You emphasize the potential reward and boost confidence. US President Trump said that the same but highlighted the negative side of the coin. He plans to send letters in about a week and half, two weeks to countries/blocs informing them how high unilateral tariff rates will be after July 9. He stresses the punishment for dragging your feet in trade negotiations. And while this timeline still allows for last-minute efforts to avoid the worst possible outcome, it put markets back on alert when it comes to trade wars. Today’s biggest victim is the US dollar. The trade-weighted suffers from a US institutional crisis. The trade-weighted greenback (DXY) set a minor new low for the year (<98; weakest since April 2022). EUR/USD pierced the previous YtD high a 1.1573 to change hands above 1.16 for the first time since October 2021. We stick to our buy-the-dip call with medium term target at 1.2349 (full retracement on 2021-2021 EUR/USD-decline). Risk sentiment hit a snag as well. Main European indices lose up to 1% with key US benchmarks showing opening losses of 0.2%-0.5%. Breaking with the “Sell America” trade today are US Treasuries. US yields drop 6 to 7 bps across the curve with the belly of the curve outperforming the wings. Investors fear recession risks which will prompt the Fed faster-than-expected in action. They feel vindicated by yesterday’s CPI inflation numbers which in May showed no signs whatsoever yet from tariff-related price pressure. Categories in focus like furniture, cars (new & used), apparel or clothing all showed month-on-month prices declines. It’s too early to tell whether it’s because companies not raising prices (yet) or whether they are running down inventories built up in the run-up to Liberation Day. Today’s producer price inflation rose less-than-feared as well (0.1% M/M for headline and core vs 0.2% & 0.3% expected respectively). Contrary to yesterday’s CPI, there was a significant upward revision to April PPI data, making today’s report somewhat more mixed. US weekly jobless claims stabilized just below 250k. Since end 2021, claims only passed that level on six occasions. Today’s Treasury’s performance lifts some pressure of tonight’s scrutinized $22bn 30-yr Bond auction in light of deteriorating public finances under Trump’s big beautiful bill. We’d err against buying into the US Treasury rally, especially at the longer end of the curve as Treasuries continue losing their safe haven appeal. German Bunds and UK Gilts performed well as well today, both in a bull flattening move. EUR/GBP extends the rally which started after a weak UK labour market report earlier this week, rising from 0.8480 to 0.8525.

News & Views

The Norges Bank (NB) published Its Reginal Network Contacts Survey ahead of next week’s policy meeting (June 19). Contacts expect growth to remain firm in Q2 and Q3 (0.4% quarterly). International trade barriers are increasing uncertainty, but only a few contacts expect this will lead to lower growth in the period to autumn. Increased defense investment and higher aquaculture output are reported to boost growth. Contacts also expect higher sales of durable goods and further growth in tourism, supporting the household related services. Construction still has the weakest expectations (-0.3% in Q2), but some expect residential construction to pick up somewhat through autumn. The share of contacts reporting capacity constraints is little changed, while the share reporting labour shortages declined slightly. Contacts expect annual wage growth of 4.5% in 2025 and 4% in 2026. The ongoing solid growth outlook suggests that the NB shouldn’t be in a rush to cut it policy rate (4.5%). Markets still see a first cut only at the September meeting. The Norwegian krone trades little changed in a daily perspective (EUR/NOK 11.57).

Indian inflation declined more than expected in May, from 3.36% Y/Y to 2.82% Y/Y (lowest since February 2019) and remaining below the Reserve Bank of India’s%-target for a fourth consecutive month. The easing in inflation was mainly driven by a further decline in food prices. The RBI last week cut its policy rate by a bigger than expected 50 bps to 5.5%, which it labeled as a frontloading move. It also lowered its inflation forecast for the 2025-26 financial year to 3.7%, but at the same time changed its policy stance to neutral, from accommodative. It this respect, the RBI indicated that, after the recent cumulative easing of 100 bps since February, it saw only limited scope to further support growth. The rupee eases modestly today with USD/INR trading near 85.6.