Key Highlights

• U.S. and Chinese officials agree a framework to implement Geneva trade consensus and resolve China’s export restrictions on rare earth minerals and magnets.

• U.S. and Mexico near deal to cut steel duties and cap imports; U.S. and India seek to sign interim deal this autumn to double trade to $500bn.

• U.K. Chancellor Rachel Reeves will announce the results of the country’s spending review today, expected to result in real-terms spending cuts for many government departments.

Chart of the Day

EXHIBIT #1: UK GILT MARKET SEES REVERSAL AFTER LONG PERIOD OF PROLONGED UNDERPERFORMANCE

^{Source: BNY}

The U.K.’s spending review today is expected to show that the government is willing to take some hard decisions on spending and to regain fiscal credibility. This is crucial for the gilt market, which has been underperforming materially in recent months. Even on a price basis, markets have observed that any form of bear steepening in the U.S. related to the country’s fiscal position or general stagflation tends to have an immediate impact on the gilt market. If anything, flows have been even more disappointing, with U.K. paper unable to benefit from a rise in demand for alternatives away from the U.S. On an absolute and scored basis, there have been periods this year which show outflows matching the sales generated during the mini-budget crisis of 2022. However, we note that the dynamics and composition of the flows are very different. Firstly, the forced selling due to deleveraging of liability-driven investments (LDIs) in 2022, coupled with BoE tightening and potential gilt sales, led to a confluence of factors which meant that selling was very concentrated. The current round is consistent but gradual. Secondly, the LDI managers were by definition a domestic cohort, and cross-border presence was limited in price action. In contrast, the current round of sales is driven by cross-border sales. This renders the lack of movement in GBP even more puzzling, but this week’s market reaction to softer wage data and the prospect of even weaker growth due to fiscal retrenchment could have far larger adverse consequences for GBP, especially if the BoE is seen to pivot back in favor of easing.

What's Changed?

Risk sentiment is broadly positive again, after 20 hours of talks in London left U.S. and Chinese officials with a framework for a consensus on rare earth minerals and technology restrictions. This now awaits approval by Presidents Xi and Trump. This was an expected source of relief, and the rally back up is tepid compared with the selling-off on larger tariffs. Frameworks require solid common ground to support better times and then even more materials to shield against inevitable storms and make a shelter. The skew of reactions reflects other factors holding back the market conviction to put cash to work, namely concerns about inflation and growth. Today’s U.S. inflation report may help, even with modest expectations of acceleration, the first in four months. Bonds are another area of concern, as the U.S. Treasury holds a 10y auction today, while attention remains focused on the U.S. Senate’s debate on the tax bill. Globally yields are higher, with France and Sweden leading the way. The final worry for the markets heading into the U.S. open is about the dollar. There was little joy from the ECB report that sees gold as the second global reserve asset ahead of the EUR, with gold holdings back to 1965 levels. There is something amiss in a return to a gold standard, reflecting broader weakness in fiat currencies, not just the dollar. A higher USD won’t add to the financial conditions narrative helping equities here. The hope pushing shares higher starts with the view that trade deals are coming fast and that the tax relief will be sufficiently balanced by other revenues to keep bond yields stable. The worry about “uncertainty” persists in the framework for delivering such changes: a keen focus on politics everywhere is driving doubts about sustainability and growth, overlaid by monetary policy that by design can’t fix government leverage. 

What You Need to Know

The U.S. and China have agreed on a framework to revive their trade truce and lift some export restrictions, following two days of talks in London. U.S. Commerce Secretary Howard Lutnick confirmed the deal would remove curbs on China’s rare earth minerals and magnets and ease some recent U.S. export controls, though details remain vague. Both countries will now seek approval from their respective presidents. The agreement builds on the faltering Geneva accord, which had stumbled over China’s mineral curbs. The World Bank has downgraded its 2025 global growth forecast to 2.3%, citing trade tensions. A more comprehensive deal must be reached by August 10 to avoid a return to punishing tariff rates. CSI 300 +0.754% to 3894.63, USDCNY -0.024% to 7.1861, 10y CGB -1bp to 1.684%.

Chancellor Rachel Reeves will impose real-terms cuts on several U.K. government departments as part of a tight squeeze on day-to-day Whitehall spending, with only defense and health spared. Local government services are expected to face the most pressure. Despite this austerity-like backdrop, Reeves is launching a £39bn affordable housing initiative – the largest in a generation – and a £113bn capital investment drive aimed at boosting infrastructure in regions outside London and the South East. Funded through relaxed borrowing rules, the capital spree will cover urban transport, nuclear power and AI. With sluggish growth and high borrowing costs, tax rises in the autumn appear likely. A full infrastructure plan is due next week. FTSE 100 +0.227% to 8873.14, GBPUSD -0.052% to 1.3493, 10y gilt +3.9bp to 4.581%.

In a carefully worded speech in Beijing, ECB President Christine Lagarde urged China to help rebalance global trade, warning that its current export-heavy strategy risks global economic instability. She stressed that both surplus and deficit countries – i.e. China and the U.S. – must share responsibility for correcting imbalances that could otherwise trigger a depression akin to past trade-induced crises. Lagarde cautioned against “coercive” trade policies and noted that unlike Cold War-era cooperation, today’s geopolitical divides, especially between the U.S. and China, amplify risks. While referencing unfair trade and de-risking, she avoided direct comments on currency dominance, despite speculation about the euro’s growing global role. Euro Stoxx 50 +0.211% to 5426.81, EURUSD +0.088% to 1.1435, BBG AGG Euro Government High Grade EUR -1.6bp to 2.781%.

According to the ECB’s annual review on the international role of the euro (2024), the euro’s global standing remained broadly stable, maintaining a 19-20% share across key indicators such as foreign exchange reserves. Despite the ECB beginning rate cuts and geopolitical tensions persisting, the euro held onto its position as the world’s second-most important currency. The report highlights rising challenges, including the global push for cryptocurrencies and shifts in trade invoicing linked to geopolitical realignments. To reinforce the euro’s role, the ECB calls for the rule of law to be upheld, the savings and investment union to be advanced, internal EU market barriers to be eliminated, and the rollout of a digital euro to be accelerated, so as to support economic security and resilience.

What We're Watching

U.S. May CPI expected up 0.2% m/m, 2.5% y/y after 2.3% y/y, with core rate ex food and energy at 0.3% m/m, 2.9% y/y after 2.8% y/y – key focus remains on super core and housing.

U.S. Treasury sells $39bn in 10y notes along with $60bn in 17-week bills – foreign demand for the 10y issue matters.

U.S. May federal budget expected to turn to deficit of $314bn from $258bn surplus in April given the end of income tax payments. The size of the debt will matter, with a keen focus on tariff revenue.

What iFlow is Showing

Mood: iFlow Mood drifted further into the risk-on zone, driven by diminished demand for core sovereign bonds combined with continued strong demand for global equities.

FX: Notable flows were strong JPY, DKK and ILS inflows vs. large PLN and MXN outflows. Overall demand for G10 FX, against mixed flows for the rest of the region.

FI: Light demand across the majors, such as U.S. Treasurys, Eurozone and Japanese government bonds, while U.K. gilts. Chinese, Singapore and Mexican bonds were lightly bought. Light selling flows were observed in Australian, Canadian and Indian government bonds.

Equities: EM APAC equities posted the strongest buying flows, especially in South Korea, India and Taiwan. Elsewhere, G10 equities were lightly sold except for buying in Japan and New Zealand. Flows in LatAm and EMEA were mixed, with significant selling in South Africa.

Quotes of the Day

“New frameworks are like climbing a mountain – the larger view encompasses rather than rejects the more restricted view.” – Albert Einstein

“Without a moral framework, there is nothing left but immediate self-indulgence by some and the path of least resistance by others. Neither can sustain a free society.” – Thomas Sowell

Economic Details

The ECB wage tracker shows negotiated wage growth (with smoothed one-off payments) of 4.7% in 2024 and 3.1% in 2025. These figures are based on agreements covering roughly 48% of employees. When one-off payments are not smoothed, growth appears slightly higher, at 4.9% in 2024 and 2.9% in 2025. Excluding one-offs entirely, the tracker shows more persistent wage growth of 4.2% in 2024 and 3.8% in 2025. The forward-looking decline is due to large one-off payments in 2024 dropping out and to front-loaded increases. The tracker is not a forecast and only covers active collective agreements. Eurosystem projections suggest compensation per employee in the euro area will rise 3.2% in 2025, slowing steadily through the year. Euro Stoxx 50 +0.211% to 5426.81, EURUSD +0.088% to 1.1435, BBG AGG Euro Government High Grade EUR -1.6bp to 2.781%.

Hungary’s consumer prices rose 4.4% y/y in May 2025, with a modest 0.2% m/m increase. Food prices surged 5.9% y/y, driven by sharp increases for eggs (+26.0%), edible oil (+25.3%), and flour (+25.0%), though margarine (-30.0%) and milk products (-7.4%) saw falls. Services rose 5.9%, with notable hikes in postal services (+11.3%) and rents (+10.4%). Alcohol and tobacco prices climbed 7.3%, and energy costs were up 5.3%, including an 11.4% jump in natural gas. Motor fuel prices fell 4.8%. Month-on-month, food rose by 0.6% and natural gas by 2.2%, while service prices dipped slightly (-0.1%) and motor fuels dropped 1.9%. Budapest SI -0.173% to 96541.82, EURHUF -0.145% to 400.36, 10y HGB +1bp to 7.04%.

Germany’s wholesale sector saw a notable recovery in May 2025 following the earlier tariff shock, with the overall business climate for production-related B2B wholesale rising to -17 points from -33 in April. Both the current situation (-14 from -25) and expectations (-20 from -41) improved significantly. This sector, which connects manufacturers with industries like construction and skilled trades, is a key early economic indicator. The consumer goods wholesale climate also improved, rising to -13 from -24. Assessments of the current situation (-14 from -21) and expectations (-11 from -27) were markedly less pessimistic. DAX +0.314% to 24062.89, EURUSD +0.088% to 1.1435, 10y Bund +1.6bp to 2.539%.

South Korea first 1-10 days exports rose 5.4% y/y, significantly better than first 1-10 days of May at -23.8% y/y. Imports rose 11.5% y/y leaving a trade deficit of $1.7bn. Daily average exports over the first ten days rose substantially to 15% y/y vs. -1.0% y/y in May. Elsewhere, chip exports were up 22% y/y, while exports to China were up 2.9% and those to the U.S. up 3.9% y/y. Meanwhile, South Korea’s May unemployment rate was unchanged at 2.7%, as the employment/population ratio recorded a new high of 63.80 and the labor force participation rate came in at 65.6. South Korea May bank lending to households rose to KRW 1,155.3tn, an increase of 4.1% y/y. KOSPI +1.225% to 2907.04, USDKRW +0.502% to 1373.9, 10y KTB -3.5bp to 2.827%.

Japan’s corporate goods price index (CGPI) fell 0.2% m/m in May 2025, though it remained 3.2% higher y/y. The drop was driven by falling prices for petroleum and coal products (-4.8%) and chemicals (-0.4%), while electricity, gas and water rose sharply (+2.0%). Export prices (contract currency basis) fell 0.9% m/m and 6.4% y/y, mainly due to declines in transportation equipment and chemicals. Import prices dropped 1.2% m/m and 10.3% y/y, led by steep falls in crude oil and LNG prices. The yen appreciated slightly in May, contributing to the downward pressure on import prices. Nikkei +0.549% to 38421.19, USDJPY +0.118% to 145.04, 10y JGB -1.1bp to 1.467%.