Key Highlights

• U.S. jobs and ISM should shift the risks for U.S. growth to the downside
• ECB to cut, BoC to wait – views shifting on central banks and soft landings
• Tariff uncertainty, tax bill debates leave bonds in spotlight

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What you need to know

The end of May is a precursor to the larger risks for June and the end of the second quarter. The shift in mood this month highlights how markets have gone from unpredictable to merely uncertain, as concerns about trade, fiscal spending and monetary policy continue to drive prices. Three themes emerged from the last week:

1. Trump’s Plan B for tariffs should the federal court ruling hold up on appeal to the Supreme Court. The fear of higher deficit spending as tariff revenues fail to materialize shows up in bonds. Doubts about trade deals and the urgency of getting them done are adding to uncertainty as we head into the summer months.

2. China trade détente stalls as the U.S. blocks student visas and as China continues to block rare earth exports. The risks of a return of tit-for-tat tariff hikes returns and the relief of shipments from May seems at risk in June. Stagflation concerns continue.

3. Momentum stalling in markets, along with lack of conviction in recovery. The April dip was bought back in May, but positions look vulnerable again in June with overweight equities in Europe and Asia. The risk of higher volatility and more data dependence will drive the week ahead.

The relief rallies from Trump policy pauses proved limited in the last week and leaves the new month at a crossroads as to whether the recent trends will continue. The focus on debt markets stands out against equity gains, while the U.S. dollar found modest relief from month-end rebalancing. Both U.S. and Japanese markets suffered in the long end of their bond market due to debt largess. The “big, beautiful tax bill” in the U.S. looks like a turning point for risk, whereas Japan has to get past its July elections and BoJ meeting. The Japan MOF suggesting it may cut longer issuance provided only temporary relief. The USD spent most of the month in a narrow trading range on concerns about hedging mixed with the strength of other currencies driving flows. Growth expectations globally are higher, after a pause on China tariffs and another on the EU helped. Hopes for a global recovery depend on the data ahead improving. The risk is that the soft data will improve just as the hard data turn lower.

_{EXHIBIT #1: THE U.S. VS. EUROPE ECONOMIC SURPRISE INDEX}

_{Source: BNY, Bloomberg}

Our take: The U.S. moved over 0 for economic surprises in May, but stalled in the last week. Growth hopes for the Q2 are modest but are dependent more on ongoing tariff reactions than underlying demand. The European recovery is ongoing, and the uptrend is holding in comparison to the U.S. There is even a risk in the week ahead that the U.S. data will shift back down rather than extend back up.

Forward look: There is a risk that the noise of better survey data in May linked to tariff relief won’t translate into the hard data on growth and inflation. In the week ahead, risk will be focused on the ISM survey and jobs data, as concerns over stagflation in the U.S. and elsewhere mount.

_{EXHIBIT #2: U.S. ASSETS AND THEIR ATTRACTIVENESS – INVESTORS WANT MORE THAN SAFE RETURNS}

_Source: BNY

Our take: U.S. yields rose last week, with the 30y at 3.15% and the 10y at 4.60%, attracting some foreign investors. Our data show that cross-border investors have modest appetite for duration. But there continues to be little interest in the 7-10y duration and that matters given the importance of this segment for liquidity. U.S. equity rallies have been uneven over the last two weeks and despite a key beat by NVIDIA, many investors remain wary of U.S. tech.

Forward look: The key concern as we head into June is the level of demand for U.S. assets. Investors are mainly worried about growth, as we get set for important hard economic data releases this week. Growth has been persistently weak in Q2 while inflation has moderated, even as inflation expectations have shifted with tariffs, as the last University of Michigan consumer sentiment survey showed. The risk for markets is how the data ahead mixes with investor hopes for better returns in Q2.

What we're watching

U.S. and Canada waiting for more data before deciding?

_{Source: BNY, Bloomberg}

Our take: The first week of June will feature jobs data in the U.S. as well as the latest reads from the ISM and PMI surveys. The median consensus estimates for May employment growth, which will be released on Friday, June 6, is a robust 130k. However, expectations vary widely, underscoring the uncertainty surrounding the economy. When will the hard data finally start to match the soft data? Given that May is the first full month since “Liberation Day,” we might see some response in the labor market to tariffs, but more likely we’ll have to wait another month or so before we start to see the effects of the trade war.

Canada has a full week ahead as well, with a central bank decision on Wednesday and its own employment report, also on Friday. Canada and the Bank of Canada (BoC) are confronting a dilemma, one the U.S. might soon have to grapple with as well: sticky core inflation but weakening growth and employment combining to complicate monetary policy. Recall that the BoC does not have a growth or employment mandate, merely an inflation one. Our view is that the BoC will not cut rates this week, which makes Gov. Macklem’s post-meeting press conference all the more important – how will he and Sr. Dep. Gov. Rogers characterize the tradeoff between growth and inflation?

Forward look: The key focus ahead for both Canada and the U.S. is whether the economic data support stagflation risks or provide some relief. Growth data is more important than inflation to asset flows. We expect the risk for the week to be in the middling path where the Bank of Canada waits and investors also wait for more clarity on policy in the U.S., both fiscal and monetary. Only surprises to the downside matter in a market geared up for a long, slow summer ahead.

EMEA: A cautious ECB cut while regional politics remain in play

_{EXHIBIT #4: EURUSD VS. 30-YEAR U.S. TREASURY SPREAD AGAINST 30-YEAR GERMAN BUND}

_{Source: BNY, Bloomberg}

Our take: Another ECB cut for June is a foregone conclusion, but we do not see the Governing Council showing a preference for staying on “autopilot.” The outlook for tariffs and trade relations between the EU and its key partners remains uncertain, but there is no evidence of a serious deterioration in expectations in the data. If anything, the hawks on the Governing Council have rediscovered their voices and are calling for caution. Inflation across core Eurozone economies is now aligning with the target on an annualized and sequential basis and there will be justification in calls for the ECB to reinforce policy progress. Furthermore, there is no guarantee that rate cuts to generate looser financial conditions through a weaker EUR or lower bond yields work anymore: Global bond yields are rising in tandem to reflect general fiscal impulse (or a lack of fiscal restraint), but as this is seen as a “healthy” development in Germany and the Eurozone, the market is extracting lower risk premia from Eurozone paper. In a complete change in relationships, higher long-dated yields in the U.S. are seen as detrimental to the dollar (Exhibit #3), as the greenback is viewed as the main vehicle to extract risk premia.

Forward look: We remain concerned about EUR valuations at present, but given market fears over stronger price impulse, the language from President Lagarde will probably not be as strong compared to the April decision. However, depending on how the PMIs evolve throughout the week, the ECB cannot afford complacency around growth either. Expectations point to prints close to 50 for the preliminary prints, and the Eurozone should have targets for growth which are more ambitious than “avoiding contraction,” especially given the current valuations in equity markets, which are expecting significant fiscally funded investment. Consequently, the ECB needs to retain an easing bias though we see quarterly cuts at a more agreeable pace. Meanwhile, markets will also be more attentive to trade negotiations with the U.S. as crucial deadlines approach. U.S. officials continue to meet expectations regarding when an accord can be reached due to difficulties in achieving consensus at pace in the European Union. Recent leadership races in Central and Eastern Europe – with Poland’s result on Sunday the latest example – show a different center of political gravity in the region relative to the Commission in Brussels. Securing a deal remains the market’s base case, but wide gaps across the EU in what constitutes an optimal trade relationship with the U.S. will remain a risk factor.

APAC: South Korea presidential election, APAC regional PMI, inflation and RBI

_{EXHIBIT #5: LOOKING FOR REBOUND OF SENTIMENT POST US-CHINA DEAL}

_{Source: BNY, Bloomberg}

Our take: In the Asia-Pacific region, the focus this week will be on the South Korea presidential election, China’s May Purchasing Manager Index (PMI) as well as PMI and CPI releases from South Korea, Taiwan, Thailand, the Philippines and Indonesia.

South Korea will vote in a snap presidential election on June 3 to replace Yoon Suk Yeol, who was removed from office for placing the country under martial law in December 2024. The latest election polls see Democratic Party candidate Lee Jae-myung as the frontrunner, followed by Kim Moon-soon of the ruling People Power Party. Early voting attracted a record 19.58% of the vote and marked the highest first-day turnout since it was introduced in 2014. The new president’s top focus will be domestic economic challenges, dealing with North Korea and balancing the political and economic relationship with China and the U.S. The election is likely to reduce near-term political uncertainties and help to sustain positive market momentum. South Korea’s five-year credit default swap (CDS) is currently hovering at 30bp, near the lower end of the range for the past two years.

The consensus is for China’s May PMI manufacturing to remain in the contraction zone, while PMI non-manufacturing should hover at just above the neutral level of 50. That said, risk might be to the upside, potentially reacting to a positive U.S.-China trade deal following the U.S.-China Economic and Trade Meeting in Geneva. We will continue to monitor the situation to see if there is a rebound in sentiment following the plunge in April, when the three key subcomponents of the PMI manufacturing were in contraction, with new orders, new export orders and imports at 49.2, 44.7 and 43.4, respectively. For China’s PMI non-manufacturing, we will be focusing on services business activities, which has correlated closely with the headline index. Looking across the APAC region, ongoing trade negotiations with the U.S., positive asset prices and better-than-expected April export releases argue for an improvement in business confidence in May. We are paying special attention to the Indonesia and Taiwan PMI, which dropped substantially to 46.7 and 47.8, respectively, as well as the Philippines PMI which surged to a high of 53 in April.

APAC regional inflation has been on a downward trajectory and is likely to remain at the lower end of the range. Apart from South Korea, where inflation is marginally higher than the 2% mid-inflation target at 2.1%, headline inflation for the rest of the APAC region is below the respective inflation targets, with China’s and Thailand’s headline inflation in negative territory. Indonesia’s inflation profile is likely to be volatile in the coming months with the forthcoming electricity tariff subsidies for June and July as part of the government’s economic stimulus plan. A similar tariff discount led to a sharp decline in Indonesia’s inflation earlier in the year.

Elsewhere, Australia will release its Q1 GDP, which is likely to confirm downside growth risk as suggested by the RBA at its May policy meeting, when the central bank revised its GDP forecast for 2025 and 2026 lower to 2.1% y/y and 2.2% y/y, respectively.

Forward look: Disinflationary pressure, along with a slowdown in economic growth, is likely to continue to exert pressure on central banks to ease further. Unless there is renewed significant currency depreciation pressure, there will be more easing in the region. APAC central banks will be active, with India’s policy meeting this week and central banks in Indonesia, the Philippines, Taiwan and Thailand meeting in June. The central banks of the Philippines (BSP) and South Korea (BoK) have signaled further policy easing ahead, while the Bank of Thailand is the most cautious in the region, saying policy easing is currently ineffective, but look for government stimulus to boost growth. We see room for an extension of the risk rally in APAC in the near term, with the end of the 90-day pause on tariffs in early July firmly in mind.

Bottom line

The new month is likely to start with the hope of a calmer and more productive summer, but the dependence on data to provide clarity where policy remains opaque hangs over all markets. The best case for many investors is more of the same middling data, with melt-up risks to equities, bull steepening in bonds and a weaker dollar. Whether the economic releases and central bank decisions provide such certainty will be the key test for forecasting the next quarter, let alone the month. The week ahead features critical US ISM and jobs data (median consensus for NFP: 130k), while the ECB prepares for a cautious rate cut and the Bank of Canada navigates sticky core inflation against weakening growth. In APAC, South Korea’s presidential election (with five-year CDS at 30bp) coincides with regional PMI releases, with China’s manufacturing PMI expected to remain in contraction despite positive U.S.-China trade talks in Geneva. Regional inflation remains below target across most of APAC, with China and Thailand in negative territory. The global market landscape remains fraught with uncertainty, as geopolitical developments and economic data continue to shape investor sentiment and market dynamics.

Calendar for June 2-6

Central bank decisions

Poland, NBP (Wednesday, June 4) – The NBP is expected to keep its base rate unchanged at 5.25% at its June meeting, following a 50bp cut in May – the first since October 2023. April inflation eased to 4.3% y/y from 4.9% in March, the lowest since August 2024. Despite this moderation, Governor Glapiński said there are “no reasons for cutting Polish interest rates now,” citing persistent inflation pressures and strong wage growth. He expects inflation to remain around 5% through year-end, with no return to target until 2027. We also believe the results of Sunday’s presidential election will be of greater consequence for local asset performance in the near term. While discussions on the future rate path are ongoing within the MPC, the current environment does not support a renewed easing cycle.

Canada, BoC (Wednesday, June 4) – The market is only expecting a 30% chance of a rate cut at Wednesday’s Bank of Canada meeting. We concur that a move is unlikely. However, with the labor market deteriorating but core inflation sticky, the bank has a tricky path to navigate. Elevated uncertainty about the tariff regime – thanks to the recent court decision – will also make Gov. Macklem’s press conference key.

Eurozone, ECB (Thursday, June 5) – The ECB is expected to cut the deposit rate by 25bp to 2.00% at its June 5 meeting. April inflation held at 2.2%, with services inflation rising to 4.0%. President Lagarde said inflation is “almost at target,” but policymakers remain cautious, and further consecutive cuts are not guaranteed. Bundesbank President Nagel warned that rates are no longer restrictive and urged prudence amid persistent uncertainty. Fellow Governing Council member Holzmann called for a pause in further cuts until at least September, citing limited growth impact and global trade risks. While a June cut is widely anticipated, the ECB’s next steps will remain data- and event-dependent as it balances easing policy with ensuring inflation returns sustainably to target.

India, RBI (Friday, June 6) – The RBI is expected to implement a 25bp rate cut at its June policy meeting, lowering the benchmark rate to 5.75% while maintaining a dovish outlook. The move is seen as driven by a continued easing in inflation, with April’s headline CPI at 3.18% − below the RBI’s 4% midpoint target for the third consecutive month − and to support ongoing growth momentum. Meanwhile, India’s macroeconomic conditions have broadly improved, highlighted by a Q1 GDP rebound. Business sentiment remains strong, with May’s manufacturing PMI at 58.3, and exports returned to growth in April, rising 0.9%. However, the trade deficit widened to USD 26.4bn in April.

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