Key Highlights

• USTR initiates an investigation of Brazil under Section 301 of the Trade Act of 1974, probing into digital trade and electronic payment services, and unfair, preferential tariffs.

• U.K. inflation surprises to the upside at 3.6% y/y on higher transport costs, complicating Governor Bailey’s dovish policy guidance.

• In a surprise move, Bank Indonesia cut base rates by 25bp to 5.25% when no action was expected; it continues to “monitor the scope” for more cuts.

Chart of the Day

EXHIBIT #1: SURGE FLOW INTO EM EQUITIES

^{Source: BNY}

Yesterday’s announcement of a trade deal between the U.S. and Indonesia immediately led to a rally in ETFs exposed to the country, even during a session that wasn’t exactly conducive to risk given the upward move in U.S. yields. For whatever reason, we suspect that most emerging market economies reaching an accord with the U.S. is swiftly becoming the base case. Chinese equities rallied further on the day. Overall, this opens up significant opportunities for asset allocation in EM, which had not benefited from growth tailwinds and paled in comparison with performances in the U.S. and the Eurozone. Structural factors such as poor liquidity and access difficulties have prevented significant holdings accumulation for such assets, but there is potentially a new macro narrative. Asset allocators are looking for diversification out of over-extended developed market equities, and tariffs may just be sufficient to help shift mindsets in EM away from purely export-driven growth toward domestic demand. We do not see large-scale holdings shifts in the same way as for European aerospace and defense, responding to a structural change in the EU’s spending and fiscal preferences. However, the base is so low for EM equities that that further rotation is viable, especially if domestic investors also strengthen their home bias.

What's Changed?

Risk sentiment is globally mixed. The APAC session continued selling equities, and EMEA and U.S. futures were mixed as yesterday’s AI chip rally lost steam. The focus on earnings continues with more banks to come, plus Progressive, J&J and ASML. The surprise overnight came from Bank Indonesia cutting rates. The trade deal and rate cut suggest its government is “all in” on growth; this puts a new spin on emerging markets as an alternative positioning play in a world filled with tariff deal deadlines and signals that inflation is starting to rear its head. The goods inflation within U.S. CPI was tame but clear, while the U.K. story is more complicated, led by fuel and transport; however, both releases highlight the difficult task on central bankers’ hands as they balance growth against prices. The bond markets globally continue to matter, with Japan quietly leading amid a warning from Nippon Life that it cannot see the long-end rate peak yet. U.S. bond traders are going to be watching PPI today – like CPI but with a twist, as margins matter and the rush of IG flows this year has pushed credit closer to record-tight spreads. The worries about the hot summer ahead for prices show up in Bill Gross’s FT article summarizing the inflation theme. For the day ahead, the FOMC Beige Book could be the tipping point for another turnaround, as the bottom-up reports from the districts will likely add to stagflation worries heading into the July meeting. Fedspeakers will therefore be watched attentively today, as they battle against the pressure from the Trump administration to cut rates, and with them the government’s debt servicing costs. Unlike policymakers, markets are not all in on risk, and they look more anxious to find exits than new entrances. The difference between all in and all out will be made clear today by the price action, which suggests momentum exhaustion. 

What You Need to Know

The U.K. Consumer Price Index for June rose by 3.6% y/y, up from 3.4% in May, and by 0.3% m/m compared with 0.1% in June 2024. June’s U.K. Consumer Prices Index including owner occupiers’ housing costs rose by 4.1% y/y, up from 4.0%, and by 0.3% m/m versus 0.2% a year earlier. Transport, particularly motor fuels, made the largest upward contribution, while housing and household services, especially owner occupiers’ housing costs, partially offset CPIH gains. Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.7% y/y (goods 2.4%, services 4.7%), and core CPIH (excluding energy, food, alcohol and tobacco) rose by 4.3% y/y (goods 2.4%, services 5.2%). FTSE 100 +0.201% to 8956.26, GBPUSD +0.053% to 1.3391, 10y gilt +3.6bp to 4.661%.

In her Mansion House speech, Chancellor Rachel Reeves unveiled a Financial Services Growth and Competitiveness Strategy. This is built around four pillars: 1. Deregulation: capping Financial Ombudsman claims at ten years and cutting the interest rate it applies, speeding up FCA/PRA authorizations and halving SMCR burdens. 2. Targeted support for key sectors: new captive insurance rules, asset management reforms, Transition Finance Council backing, a fintech scale-up unit, blockchain and digital gilt initiatives, plus an Office for Investment concierge. 3. Capital requirement reforms: higher MREL thresholds, lower Basel 3.1 ratios for domestic banks, an overhaul of the ringfencing regime and an FPC bank capital review. 4: Retail investment measures: inclusion of Long-Term Asset Funds in ISAs, enhanced consumer support, a retail investment campaign and a risk warning review.

Hong Kong defends its FX peg for a fifth time as pressure extends. The aggregate balance dropped below $100bn to $86,429mn. HKD funding tightened slightly, with the 1m HKD HIBOR at 1.175%, compared with a low of 0.52% in mid-June or nearly 4% at the end of April. HKMA Chief Executive Eddie Yue Wai-man said last Friday that the Hong Kong dollar’s weakness reflected not only carry trades but also reduced demand after listed companies had paid out dividends. He added that non-local firms converting HKD proceeds for repatriation or investment, along with a seasonal drop in funding needs at the half-year point, also weighed on the currency. Hang Seng -0.294% to 24517.76, USDHKD 0% to 7.85, 10y HKGB -1.2bp to 1.417%.

President Trump announced a deal with Indonesia cutting tariffs on U.S. exports to zero while imposing a 19% levy on Indonesian goods (down from a threatened 32%). Jakarta has pledged over $19bn in purchases, including $15bn of U.S. energy, agricultural products worth $4.5bn and 50 jets. The timing and official confirmation of the tariff rate are pending. The pact seeks to erase last year’s $18bn bilateral surplus and follows earlier offers of near-zero duties on 70% of U.S. imports plus cooperation on critical minerals and defense. Indonesian President Prabowo Subianto confirmed the headline figure in comments made overnight. JCI +0.722% to 7192.018, USDIDR +0.111% to 16278, 10y IDGB -0.6bp to 6.568%.

At its 15-16 July 2025 meeting, Bank Indonesia reduced its BI rate by 25bp to 5.25%, the deposit facility rate by 25bp to 4.50% and the lending facility rate by 25bp to 6.00%. The decision reflects increasingly lower inflation forecasts for 2025 and 2026, moving toward the 2.5 ± 1% target, alongside the preservation of rupiah stability in line with its fundamentals and the need to continue supporting economic growth. BI says it is continuing to “monitor the scope” for further rate reductions. The cut shows BI’s aim to go “all out” in encouraging bank lending and growth, while maintaining price and currency stability, with future rate adjustments guided by global and domestic economic dynamics. BI noted that the U.S.-Indonesia trade deal will have a positive impact on the market.

What We're Watching

Central bank speakers: Richmond Fed Tom Barkin gives forecasting speech in Maryland; Cleveland Fed President Beth Hammack speaks on community development; Governor Michael Barr speaks at Brookings event on financial regulation; New York Fed President John Williams gives keynote remarks on the economic outlook and monetary policy at an event hosted by the New York Association for Business Economics.

U.S. June final demand PPI and ex-food, energy is forecast at 0.2% m/m, 2.5% y/y and 0.2% m/m, 2.7% y/y, respectively.

U.S. June industrial production is forecast to turn positive at 0.1% m/m, after -0.2% in May. U.S. June manufacturing production is projected to come in at 0%, after 0.1% m/m in May.

U.S. Federal Reserve to release Beige Book.

U.S. Treasury sells $65bn in 17-week bills.

What iFlow is Showing

Mood: Investors continue to be upbeat on risk despite renewed tariff-related uncertainties. iFlow Mood narrowed further toward zero levels, with a further pick-up in equity buying and stable core sovereign bond demand.

FX: USD, AUD and HUF recorded the most relative inflows, against most outflows in CLP, KRW and IDR within the iFlow universe. EUR, GBP and JPY were lightly sold, as was CNY in APAC.

FI: Mexican, Israeli and South African government bond selling stood out against broad demand for sovereign bonds globally. Australian government bonds were significantly bought, followed by U.S. Treasurys, Eurozone government bonds and U.K. gilts and then Japanese and Chinese government bonds. Corporate bonds in G10 and LatAm were sold.

Equities: Good buying flows in APAC equities, especially for South Korea, Singapore and Thailand. Elsewhere, Brazil, Poland, Türkiye and Australia were most sold within iFlow. 

Quotes of the Day

“Be willing to go all out, in pursuit of your dream. Ultimately, it will pay off. You are more powerful than you think you are.” – Les Brown

“The answers are all out there, we just need to ask the right questions.” – Oscar Wilde

Economic Details

In May 2025, the euro area recorded a goods trade surplus of €16.2bn, up from €12.7bn a year earlier. Exports rose 0.9% to €242.6bn, while imports fell 0.6% to €226.5bn. The monthly surplus jumped from €11.1bn in April to €16.2bn, driven by chemicals (€24.3bn vs. €22.0bn) and machinery and vehicles (€12.9bn vs. €12.1bn), while the energy deficit narrowed from €25.5bn to €21.4bn. January-May saw an €86.5bn surplus (vs. €81.4bn), with exports up 4.6% to €1,248.2bn and imports up 4.5% to €1,161.7bn. In the EU, May’s surplus was €13.1bn (vs. €8.9bn), exports +0.1% to €216.9bn, imports -2.0% to €203.8bn; January-May surplus €72.0bn (vs. €72.6bn), extra-EU exports +5.2% to €1,126.7bn, imports +5.6% to €1,054.7bn. Euro Stoxx 50 -0.224% to 5342.2, EURUSD +0.181% to 1.1622, BBG AGG Euro Government High Grade EUR -2.2bp to 2.876%.

In May 2025, Italian goods exports fell 2.3% m/m and 1.9% y/y in value terms (-4.3% in volume), driven by declines for sports articles (-15.1%), machinery (-4.1%) and electronics (-15.9%), while pharmaceuticals (+39.0%) and food and drink (+3.5%) rose. Exports to non-EU markets fell 4.6%, partly offset by a 0.7% gain within the EU. Imports decreased by 4.1% m/m and 1.7% y/y (-2.4% in volume), with extra-EU down 3.4% and intra-EU down 0.4%. The trade balance was +€6.163bn (versus +€6.377bn a year earlier), as the energy deficit narrowed to -€3.458bn. Import prices fell 1.4% m/m and 3.0% y/y, largely due to lower energy costs. FTSEMIB +0.381% to 40073.45, EURUSD +0.181% to 1.1622, 10y BTP +0.1bp to 3.573%.

Average U.K. private rents rose by 6.7% in the year to June 2025, reaching £1,344/month (down from 7.0% in May). Regionally, annual rent inflation was 6.7% (£1,399) in England, 8.2% (£804) in Wales, 4.4% (£999) in Scotland and 7.6% (£852) in Northern Ireland (in the year to April 2025). Within England, the North East saw the highest rent growth (9.7%) and Yorkshire and The Humber the lowest (3.5%). In the 12 months to May 2025, average U.K. house prices climbed 3.9% to £269,000 (up from 3.6% in April), with increases of 3.4% (£290,000) in England, 5.1% (£210,000) in Wales and 6.4% (£192,000) in Scotland. Separate U.K. Land Registry data also showed a 3.9% y/y rise in house prices after a 1.1% m/m gain in May. FTSE 100 +0.201% to 8956.26, GBPUSD +0.053% to 1.3391, 10y gilt +3.6bp to 4.661%.

Sweden’s registered unemployment rate rose from 6.6% last June to 6.9% this June, reports the Swedish Public Employment Service. The agency projects unemployment will peak in 2025 and then gradually fall in 2026, though forecasts are highly uncertain, influenced by trade policy and security developments, noted Lars Lindvall. The rise in joblessness was slightly larger among women, with unemployed women increasing by about 10,000 to 177,000 and men by about 9,000 to 189,000. The construction and private service sectors have been hardest hit. Youth unemployment (ages 18-24) edged up slightly to 7.8% from 7.7% a year earlier. Not including those in training programs (i.e. the “openly unemployed” measure), the unemployment rate increased to 3.8% from 3.6% previously. OMX -0.768% to 2512.98, EURSEK +0.25% to 11.3117, 10y Swedish GB +2.4bp to 2.443%.

Czech producer prices for June saw industrial prices decline for the fifth straight month, down 0.2% m/m and 0.7% y/y, while other sectors rose: agriculture +13.4%, construction +2.9% and business services +4.2% y/y. Agricultural PPI eased 0.1% m/m (eggs -7.9%, cereals -0.6%, oilseeds -0.4%; fresh vegetables +9.4%, cattle +4.9%) and climbed 13.4% y/y, led by fruit +25.1% and oilseeds +23.0%. Industrial PPI fell m/m for electricity/gas (-0.8%) and chemicals (-2.8%) but rose for petroleum products; y/y drops included chemicals (-7.9%) and coal (-10.3%), while food products put on 4.1%. Construction prices fell 0.3% m/m, with materials +0.1%, but were up 2.9% y/y. Service PPI dipped 0.1% m/m but rose 4.2% y/y. Prague SE +0.184% to 2178.27, EURCZK -0.098% to 24.645, 10y CZGB +1.9bp to 4.34%.

Hungarian wages for May 2025: full-time employees earned an average gross HUF 702,800, +7.8% y/y, and average net HUF 483,000, up 7.7%. This was below expectations of an 8.6% y/y gain. Regular gross earnings (excluding premiums and bonuses) averaged HUF 660,000 (+8.6%), with increases of 8.1% in the business sector (HUF 657,700), 9.8% in the budgetary sector (HUF 656,400) and 9.1% in the non-profit sector (HUF 691,800). Median gross earnings were HUF 562,300 (+7.9%) and median net HUF 391,200 (+8.2%). Real earnings rose 3.2% amid a 4.4% rise in consumer prices. In January-May 2025, average gross pay was HUF 690,500 (+9.0%) and net HUF 474,500 (+8.9%). Budapest SI +0.308% to 100094.9, EURHUF -0.12% to 400.13, 10y HGB -3bp to 6.95%.

In June 2025, Türkiye’s central government recorded expenditure of TRY 1,239.6bn (8.4% of the annual budget) and revenues of TRY 909.4bn (7.1%). This resulted in a TRY 330.2bn deficit. Of total spending, TRY 963.9bn (7.5%) was non-interest outlays and interest costs were TRY 275.7bn (14.1%), while the primary deficit stood at TRY 54.5bn. Revenues comprised tax receipts of TRY 764.9bn (6.9%) and non-tax income of TRY 117.8bn. Year-on-year, June expenditure rose 43.1% (non-interest +25.6%, interest +177.7%) and revenues climbed 53.8% (tax revenues +58.3%). In January-June, spending reached TRY 6,579.1bn (+43.7%), against revenues of TRY 5,598.6bn (+46.1%), leaving a TRY 980.5bn deficit, with a TRY 131.0bn primary surplus. BI 100 +0.376% to 10263.96, USDTRY +0.106% to 40.258, 10y TGB -1bp to 32.07%.

Japan July Reuters Tankan poll rose to 7 points from 6 – the first gain in three months. The uptick was driven largely by a rebound in the semiconductor sector, despite lingering concerns over U.S. trade tariffs. Looking ahead, manufacturers anticipate further improvement, projecting sentiment to reach +8 by October. Notably, the electronics machinery sector index climbed to -4 in July from -16 in June, while the chemicals index rose to +18 from +12, with several firms citing recovering chip demand as a key factor. In contrast, the transport machinery sector, which includes Japan’s vital automobile industry, saw its index drop sharply to +9 from +20. The service survey was unchanged at +30. Nikkei -0.037% to 39663.4, USDJPY -0.014% to 148.86, 10y JGB +0.4bp to 1.585%.

South Korea June export price and import price indexes dropped further to -4.5% (May: -2.6% y/y) and -6.2% (May: -5.1% y/y), respectively. Within exports, agricultural, forestry and marine product prices eased to 3.7% y/y from 6.7% in May, while manufacturing product prices shrank further to -4.5% y/y. Import prices for raw materials and intermediate goods were down -13.2% y/y and -4.9% y/y, respectively, while prices of capital goods and consumer goods rose slightly, up 1.2% and 0.9% y/y, respectively. KOSPI -0.899% to 3186.38, USDKRW +0.026% to 1387.85, 10y KTB -0.7bp to 2.88%.

South Korea June unemployment rate eased from 2.7% to 2.6% s.a. y/y. While the headline numbers were strong, some details were weak. The manufacturing and construction sectors, considered the backbone of the economy, remained sluggish. The manufacturing sector lost 83k jobs, while the construction sector shed 97k jobs versus one year ago. Employment in the public health and social welfare sector rose 216k, while the technology services sector added 102k over the same period. The employment-to-population ratio fell back slightly to 63.6% from 63.80%, with economically active population participation at 65.4%.

Non-resident holdings of New Zealand bonds rose to 62.7% from 61.9%, the highest since 62.9% in March 2024. Since events in Q2, there has been a light pick-up in demand for sovereign alternatives, and developed market assets have benefited from even marginal rotation away from U.S. Treasurys. However, New Zealand is not the most highly rated in the region, and the economy is struggling to generate savings surpluses akin to those observed elsewhere in Asia-Pacific. Meanwhile, credit ratings are not as strong and flow performance pales in comparison with Singapore. NZX 50 +0.512% to 12754.59, NZDUSD -0.118% to 0.5939, 10y NZGB +1.4bp to 4.589%.