Key Highlights

• Volatility surrounding Fed Chair Jerome Powell’s future following President Trump’s comments has lingering impact, especially on U.S. bonds.

•  Japan bank lobby sees debt downgrade risk if government spending unchecked; JGBs remain volatile into July 20 election.

• New U.S. assessment shows air strikes destroyed only one of three Iranian nuclear sites, sees restart in months; Trump rejects larger attack plan.

Chart of the Day

EXHIBIT #1: SHORT UTILIZATION IN U.K. AND SWEDISH FIXED INCOME

^{Source: BNY}

With inflation and growth risks diverging globally, we find it surprising that our data generally show alignment in short utilization of sovereign bonds. Global bond markets have likely taken the view that where China and the U.S. lead on growth and prices, the rest of the world should follow, meaning no need to anticipate steepening risk in the absence of any significant fiscal shocks or miscalibration in financial conditions. However, these are precisely the factors in play, and we see low levels of bond shorts in various economies where recent data and policy have delivered surprises, leaving investors exposed. For example, despite the well-documented stagflation risks which continue to affect sentiment toward the U.K., we find that total short utilization in U.K. assets – dominated by gilts – is at a low for the year. Considering recent adverse fiscal developments in the U.K., the 7% reduction in gilt shorts points to mispricing. The other recent strong inflation surprise to the upside was in Sweden. After relatively robust interest rate reductions, we can see that total short utilization had also fallen to the lowest levels this year. However, the recent recovery clearly reflects some hedges being put in place in the case of more excessive moves in price growth. 

What's Changed?

Risk sentiment is positive. Global equities moved higher on the back of earnings releases and easy monetary policy expectations. The bond markets are a different story: U.S. rates are higher, with an ongoing focus on the pressure on Fed Powell. This is compounded by mixed economic reports, ranging from weaker Australian jobs (adding to June RBA rate cut expectations) to fears of a Japan debt downgrade linked to the July 20 election outcome and fiscal concerns coupled with weaker trade exports, to June Eurozone CPI in line with expectations, and to U.K. wages, where BoE rate cut hopes clash with the data. The focus on monetary policy divergence will drive markets today, with NY Fed Williams adding to the view that the FOMC will not cut in July and maybe not in September. The risk of more pressure on the Fed from President Trump follows and risk premiums are higher. The ongoing Q2 earnings announcements will focus on TSMC and Netflix. That, together with trade hopes, will drive equities. On the tariff deal front, markets are less nervous, with 10-15% letters for 150 nations likely, and with EU and Japan talks ongoing into August 1. The interesting correlation break today isn’t in the return of the see-saw, with bonds down and stocks up, but rather in USD and stocks both up. The key for the day rests in U.S. growth hopes, with retail sales, the Philadelphia Fed business outlook and the NAHB housing index all important pieces of the puzzle for investors on the nascent return of U.S. exceptionalism trades. The myriad of Fedspeakers will also be important, as they will be asked about Fed independence and their own views on tariff inflation risks ahead. The odds of Chair Jerome Powell leaving his post by August are low now, at 9%, but they remain a large part of the risk puzzle for the day. Putting the pieces together is the work of the day, with any surprise jagged edges from politics or geopolitics harder to handle. Investors want a simple story, while the world is delivering a complex puzzle. 

What You Need to Know

U.K. March-May 2025 annual earnings growth was 5.0% for both regular earnings (excluding bonuses) – the lowest in three years but higher than the 4.9% y/y expected – and for total earnings (including bonuses). Real-terms growth was 1.1% for regular pay and 1.0% for total pay using CPIH and 1.8% and 1.7%, respectively, using CPI. In May 2024-May 2025, the U.K.’s payrolled employees fell by 135,000 (0.4%), including a 25,000 (0.1%) drop between April and May 2025; March-May headcount decreased by 81,000 (0.3%) y/y and 68,000 (0.2%) q/q. The provisional June 2025 estimate was 30.3 million, down 178,000 (0.6%) y/y and 41,000 (0.1%) m/m. The U.K. March-May 2025 employment rate was 75.2%, unemployment was 4.7% and inactivity was 21.0%. The U.K. June 2025 claimant count rose to 1.743 million, vacancies fell by 56,000 to 727,000 in April-June, and May 2025 saw 37,000 working days lost to disputes. FTSE 100 +0.342% to 8957.09, GBPUSD -0.284% to 1.3384, 10y gilt +3.5bp to 4.674%.

Japan June exports posted a second straight monthly decline at -0.5% y/y, the first time since August 2023. Imports rebounded to 0.2% y/y from -7.7% y/y. The overall June trade balance was ¥153bn. In terms of destinations, exports to the U.S. were down -11.4% – the worst since February 2021 (-14% y/y) – while exports to China were down -4.7% y/y and those to Asia and EU were up 1.7% y/y and 3.6% y/y, respectively. In terms of products, machinery was the only sector to post growth, at +1.7% y/y. Elsewhere, chemicals, manufactured goods, electrical machinery and transport equipment exports were down -5.2% y/y, -8% y/y, -3.2% y/y and -3.6% y/y, respectively. Nikkei +0.6% to 39901.19, USDJPY +0.589% to 148.75, 10y JGB -1.7bp to 1.568%.

Australia June employment data came in weaker than expected at +2k against a consensus of +20k. This weakness was driven by a 34,000 increase in unemployed people. The distribution of employment changes was also more worrying, with part-time employment +40,000 and full-time -38,000. The employment-to-population ratio held at 64.2%, and participation rose to 67.1%. Total hours worked fell 0.9%, with full-time hours down 1.3%. The underemployment rate edged up 0.1 percentage points to 6.0% (0.4 percentage points lower y/y; 2.7 percentage points lower than in Mar 2020); underutilization rose 0.3 percentage points to 10.3% (0.1 percentage points lower y/y; 3.6 percentage points lower than in Mar 2020). Trend unemployment rose to 4.2%, trend employment grew by 23,000 (+0.2% m/m; +2.1% y/y), trend hours worked rose 0.1%, and trend participation (67.0%), employment-to-population (64.2%), underemployment (5.9%) and underutilization (10.1%) remained stable. ASX +0.326% to 4866.23, AUDUSD -0.95% to 0.6466, 10y ACGB -5.4bp to 4.346%.

New York Fed President John Williams said he expects tariffs to have a bigger impact on inflation in the months ahead, making the US central bank’s current restrictive stance “entirely appropriate.” Williams pointed to ongoing uncertainty and warned against complacency over the impact of President Trump’s import tax surge. Williams’s forecasts for the economy also pointed to some softening in growth, which he projected to slow to around 1% this year, with unemployment rising to around 4.5%. S&P Mini 0.032% to 6305.25, DXY +0.34% to 98.726, 10y UST +2.3bp to 4.477%.

South Korea’s foreign minister nominee, Cho Hyun, said during his parliamentary confirmation hearing that reaching a trade deal with the U.S. before the 25% tariffs proposed by President Trump take effect in August “seems possible,” noting both sides view one another as key partners. While Cho did not specify concessions, Washington is pushing for greater access to agricultural imports, particularly beef and rice, and relaxed digital regulations. South Korean farmers have threatened large-scale protests against easing restrictions, prompting assurances from both Cho and industry minister nominee Kim Jung-kwan to safeguard agricultural livelihoods. After months-long delays caused by President Yoon’s impeachment and the ensuing leadership vacuum, talks have resumed amid added U.S. demands for higher troop cost contributions. KOSPI +0.185% to 3192.29, USDKRW +0.18% to 1392.25, 10y KTB -0.8bp to 2.872%.

What We're Watching

Central bank speakers: Fed Governor Adriana Kugler speaks on housing and the U.S. economic outlook; San Francisco Fed President Mary Daly appears on Bloomberg TV from the Rocky Mountain Economic Summit in Victor, Idaho; Governor Lisa Cook speaks on AI and innovation at the National Bureau of Economic Research (NBER) Summer Institute; Fed Governor Christopher Waller speaks on the U.S. economic outlook and monetary policy at Money Marketeers.

U.S. June retail sales expected to rise at 0.1% m/m after -0.9% m/m, while ex-autos seen up 0.3% m/m from -0.3% in May.

U.S. June import price index and export prices are expected to come in at 0.3% m/m, 0% m/m vs. 0%, -0.9% m/m, respectively.

U.S. weekly jobless claims expected to rise to 234k from 227k, with continuing claims projected to be flat at 1.965 million.

U.S. July Philadelphia Fed Business Outlook forecast to improve from -4 to -1.

U.S. May business inventories are forecast at 0% for a second month.

U.S. July NAHB Housing Market Index is expected to improve from 32 to 33.

U.S. Treasury sells $90bn in 4-week bills, $80bn in 8-week bills.

What iFlow is Showing

Mood: iFlow Mood is marching toward zero levels, led by accelerated demand for equities combined with steady demand for core sovereign bonds. Both iFlow Carry and Value are positive and statistically significant.

FX: AUD, HUF and USD were the top three for inflows, while KRW, CLP and HKD posted the most outflows within the iFlow universe. EUR, GBP and JPY were sold within G10, while PLN, COP, IDR and HKD were most sold elsewhere.

FI: Strong buying of G10 sovereign bonds, above all in Australia and Eurozone government bonds followed by New Zealand and U.S. Treasurys. Mexico government bonds were most sold, followed by Israel, Türkiye and South Africa in the emerging market complex. Mixed flows in APAC, with lighter demand for Chinese government bonds.

Equities: U.S., Mexico and Philippines were most sold, against most demand in Australia, Brazil, Turkey, Singapore, Thailand and South Korea. Within the U.S. equities market, the industrial and consumer staples sectors posted the most excess outflows, against best demand in the consumer discretionary sector. In EM APAC, the consumer discretionary and financial sectors posted significant inflows, with minimal selling pressure in the consumer staples and health care sectors.

Quotes of the Day

“Missing pieces do more than complete the puzzle, they fill in an empty space.” – Luanne Rice

“The art of simplicity is a puzzle of complexity.” – Douglas Horton

Economic Details

Eurozone June final CPI was confirmed to have risen 0.3% m/m, 2% y/y after 0% m/m, 1.9% y/y, in line with expectations. The core consumer price index rose 2.4% y/y from 2.3% y/y. The rise in prices was led by a 1.5% y/y rise for services, followed by a 0.6% gain for food and a 0.1% rise for industrial goods, while energy was -0.2% y/y. EC50 0.78% to 5339.39, EURUSD -0.413% to 1.1593, 10y DBR +1.1bp to 2.696%.

Switzerland’s Q2 2025 seasonally adjusted exports fell 5.3% and imports 7.1% vs. Q1 2025, yielding a CHF 13.4bn surplus. The downturn was driven by the chemicals and pharma sector, with exports down 9.6% (-CHF 4.2bn) and imports down 14.2% (-CHF 3.3bn). Exports to North America plunged 25.9% (USA -29.4%), while exports of watches (+2.6%) and machinery & electronics (+1.4%) recorded their second successive quarterly gains. Import declines were recorded in all 12 product groups, particularly in chemicals and pharma, energy and metals. In June 2025, monthly exports rebounded by 8.6% to CHF 23bn and imports eased by 1.5% to CHF 18.7bn (surplus CHF 4.3bn). SMI +0.573% to 11979.07, EURCHF -0.006% to 0.93213, 10y Swiss GB -0.9bp to 0.471%.

The Netherlands’ June 2025 unemployment rate was 3.8%, with 386,000 people unemployed. Additionally, 3.2 million were outside the labor force, mainly retirees or those unable to work. This was down by an average of 6,000 per month over the past three months. At end-June, UWV reported 183.6k unemployment benefit recipients, 3k (-1.6%) fewer than in May, with 19.1k new claims and 22.1k terminations. All age groups except the 65+ bracket (+0.2%) saw declines, led by under-25s (-3.7%) and 25-35-year-olds (-2.7%), with the smallest drop among 55-65s (-1.0%). Over the three months to June, 230k people entered unemployment, while 239k exited it (by finding work or leaving the labor force), yielding a net monthly decrease of 3k. AEX 0.774% to 909.09, EURUSD -0.413% to 1.1593, 10y NGB +1.9bp to 2.878%.

Türkiye’s June 2025 Residential Property Price Index (RPPI) rose 2.0% m/m to 186.0 (2023=100 national base), marking nominal annual growth of 32.8% alongside a real-terms decline of 1.7%. Annual gains were highest in the Central East Anatolia region at 45.6% and the Northeast Anatolia region at 44.6%, reflecting strong price momentum outside major urban centers, while Hatay and Aydın posted the slowest annual increases at 20.9% and 27.3%, respectively. Among major cities, Ankara led with a 2.3% m/m rise and 42.1% y/y gain, followed by İzmir (+3.1% m/m; +31.8% y/y) and Istanbul (+2.2%; +32.7%). BI 100 +1.028% to 10225.6, USDTRY +0.096% to 40.2846, 10y TGB +14bp to 32.26%.

New Zealand’s June food prices rose 1.2% m/m after a 0.5% m/m gain. On the year, food price inflation accelerated to 4.6%, the highest since 4.8% in December 2023. Higher prices for the grocery food group and the meat, poultry and fish group contributed most to the annual increase in food prices, up 4.7% and 6.4%, respectively. Elsewhere, fruit and vegetable prices were up 5% m/m, 7.6% y/y. Lastly, rent prices eased from 2.8% y/y to 2.6% y/y, the lowest since October 2011. NZX 50 +1.182% to 12905.41, NZDUSD -0.539% to 0.5915, 10y NZGB -1.1bp to 4.578%.

Japan’s portfolio update for the week to July 11, 2025, showed Japanese investors bought foreign bonds for the fifth straight week, at ¥759bn vs. ¥1.659tn the week prior. Japanese investors resumed their foreign equity selling trend, with ¥768bn sold vs. ¥514bn the week prior. The selling trend marked a sharp reversal from record YTD buying at the end of April 2025. SPX was flat last week, hovering near its all-time high. Foreign investors net bought a low ¥170bn of JGBs last week; flows into JGB have slowed in recent weeks after strong buying momentum a few months ago. Foreigners have net bought ¥12.064tn YTD, a record YTD pace. Foreign investors’ buying momentum continues for Japanese equities, which were net bought at ¥446bn vs. ¥612bn the week prior. Nikkei +0.6% to 39901.19, USDJPY +0.589% to 148.75, 10y JGB -1.7bp to 1.568%.

Singapore’s June 2025 non-oil domestic exports (NODX) expanded 13.0% y/y after a 3.9% decline in May, with both the electronics and non-electronics segments growing. This included electronic products up 8.0% and non-electronics up 14.5% (three-month moving average +7.1%). On a first-half basis, NODX rose 5.2%. Non-oil re-exports (NORX) grew 18.5% (3MMA +24.9%), driven by a 26.2% surge in electronic NORX and a 9.1% increase in non-electronics. Total trade increased by 5.4% y/y (after 1.0% in May) as total exports jumped 10.5% (non-oil +16.7%, oil -17.1%) while imports remained flat. Key markets saw NODX gains to Hong Kong (+54.4%), Taiwan (+28.3%) and South Korea (+33.0%), with declines to the EU, the U.S. and Thailand. STI +0.686% to 4160.6, USDSGD +0.32% to 1.2867, 10y SGB +0.3bp to 2.146%.