Key Highlights

• President Trump threatens tariffs of up to 35% on Japan ahead of July 9 deadline; Tokyo offers sector-specific concessions but holds firm on agriculture ahead of July 20 elections.

• Israel urges China to pressure Iran to rein in nuclear ambitions, while Trump says Israel has agreed to 60-day Gaza ceasefire conditions.

• U.S. House Speaker Mike Johnson suggests vote on “Big, Beautiful Bill” could come today.

Chart of the Day

EXHIBIT #1: CROSS-BORDER U.K. GILT HOLDINGS STRUGGLING TO MATCH GERMAN BUNDS

^{Source: BNY}

The U.K.’s fiscal credibility is back in the spotlight after the prime minister abandoned welfare reforms in fear of a parliamentary rebellion. In a total fiscal reversal, what was designed to be a bill pushing for reforms and welfare savings to meet fiscal rules will result in an adverse fiscal impact, most likely in the form of tax increases. The net amounts involved are small, but the damage to fiscal credibility is palpable to a gilt market that is struggling to attract demand. Our data show that cross-border gilt holdings have fallen quite sharply from a decently overheld position to materially underheld in the space of five months, with consistent liquidation that, on a cumulative basis, now looks more severe than the mini-budget situation. Furthermore, we can see that in April, when market demand for alternatives was particularly strong, Bund holdings surged but gilts struggled to make any headway. There was a light recovery in June as sovereign investors likely hoped not to be excessively underweight; however, the lack of interest should be worrying to the government, which is already concerned about international capital flight due to its new tax regime for non-domiciled individuals, a policy which is also under review. Given current GBP valuations and fears over fiscal dominance and stagflation, we believe that for interest in gilts to pick up, the currency will have to adjust lower to compensate, in addition to more attractive yields.

What's Changed?

Risk sentiment is positive, with equities higher in APAC (except Japan) and in EMEA, and with U.S. futures also up. USD is bid but remains at three-and-a-half-year lows; meanwhile U.S. and other bond markets are offered, with U.S. 10y yields up 4bp to 4.28% and 2y holding under 3.79%, up just 1.5bp. The risks for today once again lie in global interest rates and FX. The relative calm overnight trading reflects a lack of news and the U.S. July 4 holiday, set against a mix of fears around fiscal and geopolitical events. The worry over tariffs continues in Japan, which faces a race to July 9; however, the country saw a late rally in risk on Japanese authorities’ hopes of a “win-win” agreement. Also in Tokyo, the Ministry of Finance reported record tax revenue of $524bn in FY2024, well over government expectations, which left JGB yields flat on the day. The focus on the U.K. budget is keeping GBP linked to political risks there, while the gilt market reflects the pain. The OPEC+ meeting is also in the spotlight, with Brent holding at $67.50. This level is neither quite low enough to spur more disinflation talk nor high enough to drive demand destruction. Oil prices are down 9.5% YTD, leaving room for other price increases elsewhere and matching USD weakness. Where exactly prices move up now matters, and this is becoming a focus for central bankers, with Fed Chair Jerome Powell yesterday keeping hopes of a July meeting cut alive. The day’s surprise economic datapoint comes from Europe, where higher unemployment reflects policy limits and the costs of a stronger EUR. Markets are fluid heading into the U.S. open, with little conviction ahead of tomorrow’s U.S. unemployment numbers. The ADP and Challenger layoff reports will likely be the only risks for shifting views that non-farm payrolls will be strong and that the wait-and-see stance on easing will extend to September. Any risk of a reversal rests with larger-scale rotational trading, as growth gives way to momentum across markets. Investors see fluid situations, making liquidity a priority ahead of more significant events tomorrow and next week. 

What You Need to Know

The U.K. government has scrapped a controversial welfare reform that would have limited benefits for some disabled people from 2026, in order to avoid a major parliamentary defeat. The reversal is a significant blow to Prime Minister Keir Starmer and Chancellor Rachel Reeves, whose fiscal plans may now require tax increases at the autumn budget. The U-turn has cast doubt on the government’s ability to deliver spending cuts, exposing internal divisions and weakening Starmer’s authority. Observers expect further pressure on ministers to balance public finances through either new revenue measures or deeper cuts elsewhere. In comments made overnight, Cabinet Minister Pat McFadden did not rule out fresh tax rises. FTSE 100 -0.024% to 8758.9, GBPUSD +0.212% to 1.3761, 10y gilt -4.6bp to 4.443%.

The People’s Bank of China will require institutions in the precious metals and gemstones industry to report any single or cumulative daily cash transaction of ¥100,000 or more (or the foreign-currency equivalent) to the China Anti-Money Laundering Monitoring and Analysis Center within five working days, effective August 1. The regulation aims to strengthen anti-money laundering and counter-terrorism financing oversight in the sector by mandating reporting and compliance obligations for large-sum transactions. CSI 300 +0.17% to 3942.76, USDCNY -0.026% to 7.162, 10y CGB -0.2bp to 1.648%.

Australian retail turnover rose 0.2% in May 2025, following no change in April and a 0.2% rise in March. The increase was driven by a rebound in clothing (+2.9%) and department store sales (+2.6%) as consumers resumed winter purchases after warmer weather in April. Other categories were weaker: food retailing fell 0.4%, cafes and household goods were flat, and other retailing declined 0.2%. Western Australia led state gains with a 0.7% rise – its seventh consecutive monthly increase – while Tasmania saw the only fall (-0.1%) and the Northern Territory was unchanged. Overall, non-food spending supported modest national growth. ASX -0.016% to 4772.02, AUDUSD +0.076% to 0.6586, 10y ACGB -4.6bp to 4.116%.

Eurozone May unemployment rose to 6.3% from 6.2%, worse than the expected 6.2%. The number of unemployed people rose 54,000 to 10.83 million. In the EU as a whole, the unemployment rate held steady at 5.9%, slightly below the 6.0% recorded in May 2024. Eurostat estimates there are 13.052 million unemployed people in the EU. Youth unemployment held steady at 14.4% (revised up from 14.3%). By nation, Germany (3.7%) and the Netherlands (3.8%) reported the lowest unemployment rates, while Spain (10.8%), France (7.1%) and Italy (6.5%) continued to post higher levels. A year ago, the jobless rate was higher, at 6.4%. Euro Stoxx 50 -0.182% to 5293.6, EURUSD -0.009% to 1.1786, BBG AGG Euro Government High Grade EUR -283.5bp to 0%.

What We're Watching

Poland central bank rate decision – no cut expected, with rates at 5.25%.

U.S. June ADP employment change expected to come in at 95,000 after May’s 37,000 with some revisions; the focus will be on wages and sectors hiring.

What iFlow is Showing

Mood: We continue to see marginal improvements in iFlow Mood and expect the index to move toward neutral soon. Nonetheless, cash demand remains strong across key markets and may inhibit any surge toward outright risk-on.

FX: There was a month-end surge flow into EUR, most likely caused by a rise in hedging of non-Eurozone assets, as the cross-border purchase component was not as strong. SEK and USD are the underperformers within G10.

FI: Some yield interest is returning as India and Hungary perform well. Middle Eastern markets are very soft, in a clear sign that developments in June have led to some rebalancing away from the region.

Equities: Core markets are largely flat at the start of the quarter. Japan continues to perform well, with the Nikkei having broken through 40,000.

Quotes of the Day

“The very ink with which all history is written is merely fluid prejudice.” – Mark Twain

“Because if time can be fluid, then maybe something that is just one day can go on indefinitely.” – Gayle Forman

Economic Details

Australia’s total dwelling approvals rose 3.2% in May to 15,212, driven by an 11.3% increase in private sector dwellings excluding houses. Private house approvals rose 0.5% to 9,454, the highest figure since October 2024. This was led by a 9.5% jump in Victoria, partly offset by decreases in Western Australia (-7.6%) and New South Wales (-5.4%). Apartment approvals rebounded strongly after an April fall, rising 40.1% in original terms, with New South Wales leading gains (2,274 approvals vs. 672 in April). Overall, apartment strength underpinned the monthly growth in approvals. ASX -0.016% to 4772.02, AUDUSD +0.076% to 0.6586, 10y ACGB -4.6bp to 4.116%.

The Ai Group Australian Industry Index fell 1.8 points to -11.9 in June 2025, extending its contractionary streak to 36 months. While business services continued to improve and construction saw an ongoing recovery, manufacturing weakened further, particularly in machinery and metals. New orders and input volumes declined, reflecting weak demand and cautious spending. Employment stabilized, and capacity utilization edged up to 77.9%. Input prices and average wages fell, suggesting easing inflation pressures, while sales prices rose modestly. Sector-wise, chemicals rebounded, but metals and food-related manufacturing contracted sharply. Despite isolated improvements, overall industrial conditions remain weak and uneven.

Italy’s unemployment rate rose to 6.5% in May 2025, up 0.4 percentage points m/m, as the number of jobseekers increased by 7.1% (+113,000). Youth unemployment also climbed to 21.6% (+1.7 points). Despite this, employment grew by 0.3% (+80,000), driven by gains among permanent employees, self-employed people and workers aged 50+, while temporary jobs declined. The employment rate rose to 62.9% (+0.2 percentage points), and the inactivity rate fell to 32.6% (-0.5 percentage points). Compared with May 2024, employment increased by 408,000, led by stable and self-employed positions, while fixed-term jobs fell by 5.5%. FTSEMIB -0.374% to 39643.27, EURUSD -0.009% to 1.1786, 10y BTP -5.3bp to 3.423%.

In June 2025, registered unemployment in Spain fell by 48,920 people (-2%) to 2,405,963, the lowest June figure since 2008. Compared with June 2024, unemployment declined by 155,104 people (-6.06%). All sectors saw improvements, led by services (-38,253), industry (-4,589) and construction (-3,029). Female unemployment dropped by 25,537 to 1,460,884 – the lowest June level since 2008 – while male unemployment decreased by 23,383 to 945,079. Youth unemployment fell by 4,296 to a record low of 166,707. The number of contracts signed rose 8.46% to 1,496,673, of which 39.26% were permanent. In May, 1.45 million people received benefits, with a 74.4% coverage rate. IBEX 35 -0.171% to 13897, EURUSD -0.009% to 1.1786, 10y Bono -4.9bp to 3.193%.

South Korea’s consumer price index (CPI) was unchanged m/m in June 2025, with annual inflation rising to 2.2%, from 1.9% in May. Core inflation (excluding food and energy) increased by 0.1% m/m and 2.0% y/y. Among major categories, household furnishings saw the largest monthly rise (+1.1%), while prices for transport and recreation declined. Food prices remained flat, while annual inflation was led by furnishings (+4.4%) and miscellaneous goods and services (+4.4%). Despite recent stability, price pressures remain concentrated in non-energy and non-food categories. KOSPI +0.584% to 3089.65, USDKRW -0.008% to 1353.65, 10y KTB +2.2bp to 2.807%.

Thailand’s Business Sentiment Index (BSI) rose to 48.6 in June from 46.7 in May, though Q2 sentiment weakened overall, driven by sharp declines in the hotel, restaurant and real estate sectors amid falling Chinese tourist arrivals and tariff concerns. The three-month expected BSI also fell, with both manufacturing and non-manufacturing outlooks deteriorating. Sale price sentiment hit a five-year low due to weak pricing power in the auto, steel and tourism sectors. High production costs and economic uncertainty were top concerns. Expected inflation remained stable at 2.3%, while the government’s tourism subsidy offered some support to domestic confidence. SET +1.418% to 1105.01, USDTHB -0.222% to 32.43, 10y TGN +0.1bp to 1.603%.