Key Highlights

• Start of Q2 earnings reports will shift focus from macro to micro for equities
• Bonds and FX will be back to watching hard data for soft spots
• Markets pivot beyond tariff headlines to focus on a “stretched” FX, with tail risks increasing

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What you need to know

Equities are drifting into the “dog days” of summer, with volatility suppressed more by the absence of hedging than by any sort of conviction. Just how hedged cross-border holders of U.S. assets are remains central to the dollar, leaving the currency poised to rebound should the Fed hold rates. A September cut is still priced, but sticky inflation and better growth may raise the odds of a single move in December – or no move at all. The coming U.S. data slate will test that view: CPI (Tuesday), PPI (Wednesday), retail sales and TIC flows (Thursday), plus housing and the Michigan survey (Friday). A PPI print running above CPI would flag a margin squeeze, especially as import prices have yet to fall, suggesting exporters are not absorbing tariffs. Cross-border flows are slipping, and a renewed home bias is evident. With the 10-year Treasury anchored above 4.20% and the Treasury favoring front-end issuance, the rest of July remains pivotal for risk assets.

The consensus from central banks and asset managers is that the USD and U.S. rates will remain the linchpins of global risk appetite through July, with tail risks for a sell-off rising into August. Some APAC clients see the lower USD as “stretched” but not yet at a turning point and expect the broad dollar trend to follow the fed funds rate cycle. Meanwhile, U.K. and Swiss wealth managers are grappling with the cost of hedging USD exposure, given that both EUR and GBP look expensive on a relative basis. Carry trades – especially in EM currencies like COP, HUF, IDR and BRL – have been a popular play, but with these currencies now “overheld and above profitability levels,” the risk of a sharp unwind is growing. iFlow data show that TWD is underheld and at a loss, suggesting a potential rotation into Asian FX, but the broader message is clear: carry and momentum are tightly linked, and a sudden reversal in carry trades could be an early warning sign of broader risk-off sentiment and equity weakness.

Shifting views ahead of Q2 earnings releases

_{EXHIBIT #1: DEVELOPED MARKET EQUITY SECTOR HOLDINGS AND FLOWS – FINANCIALS AND UTILITIES LEAD}

_{Source: BNY, MSCI}

Our take: Total G10 equity holdings are interesting in that no sectors are seeing outflows other than Materials, although this involves profit-taking from long holdings, while only three sectors are seeing short covering. Investors are holding more equities now than they did in the summer of 2024. The upcoming Q2 earnings reporting season will test the market’s balance between momentum and value, with the focus on the dual role that Utilities play in portfolios as a hedge against a big slowdown and as a beneficiary of ongoing AI investments driving data center energy demand. Financials and Real Estate are stretched globally and look vulnerable to policy rates, while Health Care and Energy – the least favored sectors – may surprise should the economic data continue to point to a soft landing globally.

Forward look: Q2 earnings in the U.S. next week will mark a shift from macro trade tariff concerns to micro individual company views. The outlooks from CEOs globally set the pace for future investments and growth against the costs of labor and goods. Global equity holdings look vulnerable to outside shocks – and are unlikely to find much comfort in rate cuts or trade tariff extensions.

What We’re Watching

U.S. focus back on data with key releases set for this week

_{EXHIBIT #2: U.S. CPI AND PPI} 

_Source: BNY

Our take: Given the Fed’s data dependency and the market’s questions about the outlook for U.S. growth and inflation for the rest of the summer, this week offers a number of important releases, with PPI, CPI, retail sales and TIC data and the Fed Beige Book all due out. Investors have been “numbed” to responding to trade tariff letters in the last week, but they continue to respond to hard data surprises – with the U.S. jobs report an example from last week. The risks for the week ahead come from a return to “stagflation” views where the Fed policy of wait-and-see promotes less market stability and more volatility. 

Forward look: The impact of tariffs is not yet readily apparent in the inflation data, so this week’s data will be key to seeing if the inventory buildup and discounting by sellers has run its course. Rising PPI in excess of CPI could indicate a margin squeeze for producers. Import prices could also offer a look into exporters’ pricing behavior – prices haven’t fallen over the last few months, indicating that shippers to the U.S. aren’t discounting their prices and “eating” the tariffs.

Anecdotal and survey data on the economy will be made available during the week, including the Philadelphia Fed PMI and the Michigan survey, as well as the Fed’s Beige Book. Last time around, the Beige Book indicated some slowing amid high uncertainty and a weakening outlook.

The Treasury’s TIC data (Thursday) will show trends in foreign holdings of U.S. assets, and housing data is due out on Friday, which we expect to underscore growing weakness in this sector. Retail sales on Thursday are also an important release, and signs of weakness in consumption could spook the market and reignite the rate cut discussion.

EMEA: European data tests come to the fore as policy paths are under scrutiny

_{EXHIBIT #3: GERMANY VS. U.K. EQUITY HOLDINGS}

_Source: BNY

Our take: The ECB cannot afford an early summer lull ahead of the July rates decision as both domestic data and external conditions are not showing any sign of improvement. As the Commission continues to struggle to reach a trade accord with the U.S., uncertainty will prevail for industry, and we see continued risk of data surprising to the downside. We have already detected a softening of tones among ECB members only a week after Sintra regarding tolerance for the euro and the cessation of the current easing cycle. For example, Bank of Spain Governor de Guindos has moved away from calling 1.20 a level beyond which things would “get complicated,” to hoping for current stabilization. Even Bundesbank President Nagel said that the ECB should not “exclude another rate cut.” When ECB officials refer to inflation risks, there is now greater weight to the downside given the current trajectory of prices. Consequently, final June inflation prints (2.0% y/y expected) may intensify attempts to change the current messaging surrounding policy expectations. The breakdown of inflation will be particularly important, as there will be some signs of pass-through a quarter into the euro’s rally. If non-tradables inflation is similarly facing additional stress, the ECB will need to step up vigilance.

Forward look: We believe EUR will face increasing headwinds ahead, but this need not threaten outflows per se. Interest in duration will continue to rise, while a lid on currency valuations will also help as an earnings translation buffer. Ultimately, the Eurozone economy will continue to benefit from higher public demand for industry (via defense spending) and the ECB is in both a macro data and nominal levels position to move on rates. This is on contrast to the U.K., where upcoming inflation numbers for June (3.4% y/y headline, 4.5% y/y services expected) are expected to cause further angst over stagflation fears, coupled with the risk of significant stress in gilt markets – a matter the Chancellor must address head-on during her Mansion House speech on July 15. Even with the prospect of a weaker sterling, which may also benefit U.K. equities due to earnings translation, we see U.K. equity holdings (on a cross-border basis) are struggling against their German and Eurozone peers (Exhibit #3). Despite high revenue exposures overseas, the current U.K. fiscal path once again threatens correlated selloffs in gilts and the pound. There was a clear deterioration in industrial relations between the UK government and public sector workers at the beginning of July, and the market will be faster in pricing in further budgetary slippage, but in an increasingly inhospitable sovereign bond market environment for fiscal dominance.

Consumption a Bright Spot for China But Not Enough to Sustain Growth

China Economic Shifts and Regional Export Trends

_{EXHIBIT #4: UNEVEN FRONT-LOADING EXPORT ACTIVITIES}

_Source: BNY

Our take: In the Asia-Pacific region, the primary data focus this week will be on China’s June activity, investment data and the latest housing market developments as well as Q2 GDP releases. Elsewhere, there will also be June exports releases from Malaysia, Thailand, India, Singapore and Japan.

China’s Q2 GDP is expected to ease from 1.2% q/q, 5.4% y/y to 0.9% q/q, 5.1% y/y. The country’s investment momentum has eased after a strong Q1, when fixed asset and infrastructure investments stood at 3.7% ytd y/y and 5.6% ytd y/y, respectively, down from 4.2% and 5.8% in March. Industrial production slowed from 6.5% in March to 6.3% ytd y/y, while high-tech production growth continues to be solid, with new energy vehicles and industrial robot production at 40.8% ytd y/y and 32% ytd y/y, respectively. Domestic consumption has been the bright spot with accelerating growth recovery at 5.0% ytd y/y in May, up from 3.5% at the end of 2024. The latest June housing data will be closely scrutinized given accelerating m/m prices in both new and used homes, which is probably the reason for rising calls for further policy support for the sector.

June trades and exports data from China, Malaysia, Thailand, India. Singapore will be watched closely after series of better-than-expected front-loading-driven export strength in Q1. Exports from Taiwan, Thailand, Indonesia and the Philippines gained momentum in May, while China, Malaysia, Singapore and India saw exports plunge to negative year-on-year in May. Faltering export growth is likely to cause downside risk for the region.

Elsewhere, Japan’s June national CPI will be closely watched. Headline CPI is expected to drift lower in line with Tokyo June inflation, but core ex-fresh food and energy inflation is seen as staying elevated at around 3.3%, keeping the BoJ’s tightening bias alive. Australia’s June employment rate will be interesting following the surprise Reserve Bank of Australia on-hold decision last week.

Forward look: Asia risks have held up well despite renewed tariffs uncertainty. While we can’t disagree with market optimism for an eventual positive and smooth outcome beyond the August 1 deadline for trade negotiations, we are concerned the market may be overly complacent. In our view, persistent currency strength amid weakening macro fundamentals is not sustainable. A positive development in the region is the return of foreign investor inflows into APAC assets, especially in Taiwan, South Korea and India equity markets and solid Stock Connect program southbound inflows supporting the Hang Seng index. It will be interesting to watch the development of the Japanese as we move into the weekend elections for Japan’s upper house of parliament on July 20.

Bottom line

Looking ahead, the market is wrestling with the Fed’s next move. While a September rate cut remains priced in, conviction is low, and there’s a real possibility that we see just one cut in December—or none—if inflation proves stickier than expected and labor markets hold steady. The 10-year Treasury yield holds over 4.20%, and if the Treasury continues to favor short-end issuance, we could see a liquidity squeeze at the front end of the curve while long-term rates rise further. This dynamic, combined with the fact that cross-border flows are declining and investors are showing a renewed “home bias,” suggests that rest of July will be pivotal for risk assets despite the summer heat and pressure to just remain passive and go to the beach.  If the USD remains steady and U.S. rates stay elevated, the risk of a broader sell-off for risky assets—especially in crowded carry trades and unhedged equity positions—will increase as we approach August. For now, the market’s fate is inextricably tied to the path of the dollar and the Fed’s ability to thread the needle between growth and inflation risks.

Calendar for July 7-11

Central bank decisions

Indonesia, Bank Indonesia (Wednesday, July 16) - Bank Indonesia (BI) is expected to deliver the third rate cuts this year to 5.25% to stimulate growth and boost attractiveness for Indonesia government bonds. Bank Indonesia’s Governor Warjiyo commented recently that Bank Indonesia is “all out pushing economic growth” by lowering key rate twice and will lower it again. We expect BI to maintain its current triple intervention strategy as well as via offshore NDF.

Data Calendar

Event Calendar

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