Key Highlights

• President Trump considers early appointment of former Fed Warsh or CEA Hasset to replace Federal Reserve Chair Powell when his term expires next year.

• U.S. and Iran to hold talks next week, Trump says nuclear deal not necessary after strikes, while Iranian authorities push internal security crackdown.

• U.S. dollar is trading at three-year lows on worries about Fed independence, debt and inflation.

Chart of the Day

EXHIBIT #1: MXN FLOWS SEE MINIMAL GAINS AHEAD OF BANXICO DECISION

^{Source: BNY}

Banxico is expected to cut rates by 50bp to 8% today, as the central bank seeks to take advantage of the high starting point in nominal rates to loosen financial conditions. The dollar’s general softness has generated some additional policy space, and with trade tensions likely to ramp up, some pre-emptive support for the economy is understandable. Given the risks in play, we would not be surprised if, unlike its APAC peers, Banxico does not prioritize trying to maintain exchange rate stability as long as inflation expectations remain anchored. We can see that flows in MXN have been negative throughout the quarter. As for most risk-sensitive currencies, sales were strong around “Liberation Day”; Mexico’s unique exposures to U.S. demand likely aggravated this selling, even though the focus at the time was on Europe and Asia rather than the U.S.’s trading partners in the Americas. Sales turned swiftly in late April with a carry recovery led by the LatAm region. MXN struggled with a new round of risk unwinding in early June, with focus on stagflation risks and monetary policy. Heading into month/quarter-end, some inflows are finally emerging, and rebalancing interest may come into play. Even so, sustainable FX-related flows appear elusive for now, and there is scope for renewed deterioration as easier policy meets fresh trade-based volatility.

What's Changed?

Risk sentiment is positive. The pressure on FOMC Chair Jerome Powell has hit the USD, in turn supporting U.S. equities, and the Iran-Israel ceasefire continues, supporting lower oil prices. The Fed’s plans to cut the SLR, announced yesterday, are also helping stock and bond bids today. The trifecta of FX, rates and equities is driving easier financial conditions, which are mixing with month-end rebalancing to reprice risks everywhere. The quarter-end portfolio rebalancing process is like rebooting a computer: sometimes it clears the glitches and troubles, and sometimes it’s more serious. Nevertheless, our flows have shown negative risk (selling global equities, buying bills), with our mood index significantly lower on the month. The uncertainty of July remains: it holds in store more key jobs and inflation data, more political risks in Japan and the U.S. with its tax bill, and an ongoing focus on tariffs and talks to push these down. Q2 earnings and the modest earnings expectations are also in play for the month ahead, leaving many investors reluctantly bullish. The wall of worry ahead is being scaled one event at a time. The day ahead is likely one of those bricks in the wall; U.S. economic releases – from durable goods and inventories to the goods trade deficit and weekly jobless claims – will be key. On top of that are more Fedspeakers and risks of a July cut, further bond supply from the 7y sale, and more headline watching on topics from the tax bill to President Trump’s geopolitical policy plans. The question for sustaining risk will be how investors reprice or reboot as they face the end of Q2. 

What You Need to Know

President Trump is reportedly considering announcing Jerome Powell’s successor as Federal Reserve chair as early as this summer – months ahead of Powell’s May 2026 term expiry – in a bid to shape monetary policy in advance. Frustrated with the Fed’s cautious stance on rate cuts, Trump has discussed naming a preferred candidate by September or October. Contenders include former Fed governor Kevin Warsh, National Economic Council director Kevin Hassett, Treasury Secretary Scott Bessent, former World Bank head David Malpass and Fed governor Christopher Waller. An early announcement could put pressure on the Fed’s decision-making but risks politicizing the role and complicating confirmation. Powell has stated he remains focused on economic stability. S&P Mini 0.301% to 6165.5, DXY -0.593% to 97.1, 10y UST -2bp to 4.271%.

The Hong Kong Monetary Authority has intervened in currency markets by spending over $1bn to defend the city’s dollar peg, which has come under pressure from U.S. dollar volatility. The action aimed to return the currency to its permitted trading band by draining liquidity and raising borrowing costs, making bearish bets more expensive. The move signals a clear intent to maintain the peg, even as debate over its long-term sustainability intensifies and carry trade funding becomes costlier. Hang Seng -0.61% to 24325.4, USDHKD -0.004% to 7.8497, 10y HKGB -1.2bp to 1.417%.

Germany’s consumer sentiment weakened slightly in June, with the GfK climate indicator falling 0.3 points to -20.3 for July 2025. While economic expectations rose sharply to 20.1 – the highest level since February 2022 – and income expectations climbed for a fourth consecutive month, a rising savings rate (+3.9 points to 13.9) dampened overall sentiment. Consumers remain cautious, with willingness to buy largely unchanged at -6.2, reflecting continued uncertainty, especially regarding U.S. trade policy. Optimism about the economy is supported by moderate inflation, favorable wage agreements and upcoming pension increases, as well as stimulus measures expected to boost growth in the second half of 2025. DAX +0.689% to 23660.28, EURUSD +0.618% to 1.1731, 10y Bund -1.7bp to 2.548%.

Sweden recorded a goods trade surplus of SEK 3.9bn in May 2025, down from SEK 10.6bn a year earlier. Exports fell 10% y/y to SEK 169.6bn, while imports declined 6% to SEK 165.7bn. Trade with non-EU countries showed a surplus of SEK 24.6bn, offset by a deficit in EU trade of SEK 20.7bn. Seasonally adjusted data showed a surplus of SEK 8.2bn in May, slightly above April’s SEK 7.8bn. For January-May 2025, the trade surplus totaled SEK 48.1bn, little changed from SEK 47.7bn in the same period last year. OMX +0.118% to 2447.177, EURSEK +0.034% to 11.0639, 10y Swedish GB -2.7bp to 2.285%.

Sweden’s economic sentiment weakened in June, with the overall barometer indicator falling 1.7 points to 92.8, below the normal level. Sentiment declined across all sectors, particularly in services, which hit its lowest reading since February 2024. Confidence also dropped sharply in retail, driven by high inventory levels, while manufacturing and construction sentiment remained near historical averages. Price expectations declined in industry but remained elevated in services. Household confidence rose for a second month but remained very weak overall. Increased uncertainty around trade policy and tariffs continues to weigh on demand and production outlooks, especially in the automotive sector.

What We're Watching

Banxico decision – Mexico’s central bank is expected to cut its policy rate by 50bp to 8.00%, marking a fourth consecutive half-point reduction despite a recent uptick in inflation.

U.S. Treasury sells $44bn in 7y notes.

U.S. May advance goods trade balance is forecast at -$91bn from -$87bn.

U.S. May flash wholesale inventories expected to rise 0.2% m/m, while retail inventories to drop -0.1% m/m. These numbers will be key for inflation and growth expectations.

U.S. Q1 final GDP, core PCE is projected to be unchanged versus previous estimates of -0.2% q/q, 3.4% q/q.

U.S. May Chicago Fed national activity index is forecast to remain negative at -0.3 vs. -0.25 in April.

U.S. May preliminary durable goods orders are expected to surge to 8.5%, while the ex-transportation measure is seen at flat 0% m/m vs. 0.2% in April.

U.S. weekly jobless claims are forecast to hold steady at 245k. with continuing claims up 5K to 1.945mn.

U.S. May pending home sales are expected to come in at 0% m/m after a sharp -6.3% drop in April.

Fedspeakers: Cleveland Fed President Beth Hammack and Fed Governor Michael Barr are speaking at a community development-focused conference. Richmond Fed President Tom Barkin is speaking on the economy at an event in New York.

What iFlow is Showing

Mood: Risk-off mode prevails despite the recovery in asset prices. iFlow Mood shows flattening out of equities demand, against continued strong demand for core sovereign bonds. iFlow Mood at -0.13.

FX: The EMEA region posted the only inflows globally, with outflows in the rest. NOK, PHP and TWD were significantly bought, while IDR and CLP recorded significant outflows. Within the G10, JPY demand continued while CHF and EUR saw outflows.

FI: Sovereign bonds were broadly bid across the G10 and LatAm, especially Mexican, Japanese and Eurozone government bonds. Hungarian, Israeli and Polish government bonds were most sold.

Equities: Strong selling bias with only five countries receiving inflows, namely Sweden, Colombia, Israel, China and the Philippines. Mexican and Malaysian equities were significantly sold, followed by South Korean and Indonesian equities. Such risk-off conditions are reflected in strong buying in the utilities sector, while materials, consumer discretionary and communication services were most sold.

Quotes of the Day

“Perhaps the earth can teach us as when everything seems dead and later proves to be alive.” Pablo Neruda

“After all, computers crash, people die, relationships fall apart. The best we can do is breathe and reboot.” – Carrie Bradshaw (Sex and the City)

Economic Details

Norway’s labor market showed mixed signals in May 2025. The unemployment rate edged up slightly to 4.5%, with the number of unemployed rising by 2,000 to 136,000. However, employment also grew modestly, with 1,000 more people employed, keeping the employment rate stable at 69.5%. Seasonally adjusted figures showed declines in both the number of employees (-2,525, or -0.1%) and jobs (-5,864, or -0.2%) between April and May. Average cash earnings also fell marginally by NOK 40 (-0.1%). These figures suggest a slight softening in labor demand despite stable headline employment rates. OSE +0.029% to 1601.01, EURNOK +0.199% to 11.8364, 10y NGB -6.1bp to 3.871%.

South Africa’s economy grew marginally by 0.1% in Q1 2025, down from 0.4% in Q4 2024, as strength in agriculture and services was offset by contractions in manufacturing, mining and construction. Household consumption remained the main driver of growth, although it slowed notably amid weak confidence and income growth. Investment declined for a second successive quarter, dragged down by reduced private sector outlay. Employment fell, led by sharp losses in the formal sector, and the unemployment rate rose to 32.9%. Inflation pressures remained subdued, with headline CPI at 2.7% in March, driven by lower fuel prices. The trade surplus narrowed as imports outpaced exports, though terms of trade improved. The current account deficit held at 0.5% of GDP. Financial inflows returned in Q1, with direct investment and reserves offsetting portfolio outflows. The rand remained volatile due to domestic political tensions and global uncertainty. Fiscal outcomes improved slightly, but national debt rose 8.3% y/y to 76.9% of GDP by end-March 2025. JSE TOP40 +0.881% to 88545.9, USDZAR -0.908% to 17.5917, 10y SAGB -4.4bp to 9.885%.

Australia’s job vacancies rose 2.9% to 339,400 in the three months to May 2025, rebounding from a fall earlier in the year. The increase was led by skilled sectors such as construction (+20.6%) and professional, scientific and technical services (+12.6%). Despite the quarterly rise, vacancies were still down 2.8% y/y, the smallest annual decrease in two years. The number of unemployed people per vacancy rose slightly to 1.8 but remained well below pre-pandemic levels, signaling continued strong labor demand. Vacancies increased across most states and in both the private (+3.2%) and public (+0.6%) sectors. ASX +0.112% to 4748.72, AUDUSD +0.522% to 0.6547, 10y ACGB -1.4bp to 4.105%.

The latest weekly portfolio update from Japan’s Ministry of Finance showed that foreigners net sold Japanese stocks for the first time after 11 weeks of buying. Elsewhere, Japanese investors bought smaller quantities of foreign bonds, at ¥616bn after ¥1,567bn the previous week. Japanese investors sold foreign equities for the sixth straight week. Foreign investors net sold ¥-369bn, but the YTD figure remains at record net buying. Nikkei +1.65% to 39584.58, USDJPY -0.971% to 143.83, 10y JGB +2.6bp to 1.423%.

South Korea’s June composite BSI manufacturing and non-manufacturing indexes eased slightly to 94.4 (May: 94.7) and 87.4 (May: 88.1). This is the first decline since February, reflecting rising U.S. tariffs on steel, aluminum and related products, as well as growing geopolitical risks stemming from conflicts in the Middle East. KOSPI -0.923% to 3079.56, USDKRW -0.625% to 1353.1, 10y KTB 0bp to 2.82%.