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Monday, Jun 9, 2025

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Week in review: Trade Uncertainty Lingers, US Data Positive… For Now

Wall Street's main indexes were set to end the week on a high note, after a better-than-expected jobs report calmed worries about the economy, while Tesla rebounded from a sharp plunge a day earlier and technology stocks continued to rise.

Stocks bounced back earlier in the week, following concerns around a deterioration in the US China relationship as well as the US economy. However, decent data out of the US and a much anticipated phone call between US President Donald Trump and China's Xi Jinping has seen some of the risk premium dissipate ahead of the weekend.

The S&P 500 hit its highest in over three months on Friday and remains nearly 2.4% below record highs touched in February. The Dow index also rose to a three-month high.

Despite the positive end to the week for US stocks, U.S. equity funds saw money pulled out for the third week in a row by June 4, as worries about U.S. trade policies continued and investors stayed cautious ahead of Friday’s key jobs report.

Meanwhile, European equity funds remained popular for the eighth straight week, boosted by lower inflation and the European Central Bank’s decision to cut interest rates on Thursday.

Data from LSEG Lipper shows investors took out $7.42 billion from U.S. equity funds during the week but invested $2.72 billion in European funds and $1.84 billion in Asian funds.

Source: LSEG

On the commodities front, Gold surrendered most of its early week gains to trade around 0.83% higher for the week. Quite a fall in Gold prices on Thursday and Friday as the precious metal touched $3400/oz on Thursday before beginning its correction, trading at $3317/oz at the time of writing.

Oil prices ended the week on the front foot as US-China talks as well as US jobs data. Markets appeared calmer regarding a global slowdown as the week progressed but uncertainty still remains.

On the FX front, the US Dollar staged a recovery late in the week. The U.S. currency was headed for a second straight weekly gain against both the yen and franc, but it was still down about 8% year-to-date and about 9% year-to-date, respectively, against both currencies.

The dollar index, which compares the U.S. dollar to other major currencies like the yen and euro, went up 0.38% to 99.05 for the day. However, it’s still set to end the week with a loss.

The Week Ahead: US and Chinese Inflation on Deck, Trade Deal Chatter Rumbles On

The week ahead is a bit of a quiet one from a data point of view with US inflation the highlight. This could leave trade deals and tariff developments top of the agenda and overall market sentiment may be the driving force for markets in the week ahead.

Asia Pacific Markets

In China, the big focus will be on inflation (CPI) and May trade data. Inflation has been falling recently due to price competition and cost-cutting, and this trend is expected to continue. Inflation is likely to stay the same as April’s -0.1% YoY figure.

For trade, predictions are less certain because of changing tariffs. Exports are expected to grow at a slower pace of 6.3%, which is still solid and matches the growth seen so far this year. Imports, however, are expected to keep shrinking. This drop in imports, combined with steady exports, has helped China’s trade surplus grow even more this year.

In Japan, the revised GDP data for the first quarter will be released soon. A small improvement is expected due to strong business investment. However, the economy is still predicted to shrink by -0.1% compared to the previous quarter, after adjusting for seasonal changes.

Economic Data from Europe, UK and the US

In developed markets, US inflation takes center stage. Following on from the May jobs report there appears to be an urgent need to cut rates. The outlook remains tough due to trade uncertainty and worries about consumer spending as confidence drops sharply. The main focus will be on inflation, which is expected to rise by 0.2% month-on-month, lower than the 0.3% forecast.

While there were fears of price hikes from tariffs, surveys show businesses are holding off on passing higher costs to customers for now. Lower service inflation is helping keep prices in check temporarily.

However, prices are expected to rise soon, as the Federal Reserve’s Beige Book noted many businesses expect costs to increase significantly. We’re likely to see more price pressures in July and August, which could delay any interest rate cuts by the Fed until late in the year.

For all market-moving economic releases and events, see the MarketPulse Economic Calendar. (click to enlarge)

Chart of the Week - US Dollar Index (DXY)

From a technical standpoint, the DXY has edged lower over the past few weeks with the trendline break on May 12 so far failing to lead to higher prices.

However, the DXY continues to hold above the April low around the 98.00 handle.

As things stand, Fridays close looks set to leave the DXY with a morningstar candlestick pattern which would hint at further upside next week.

When it comes to the DXY, recent price action has proved that overall market sentiment is a bigger driver at the moment which has been overshadowing the technicals.

Market participants may want to pay attention to the period-14 RSI which is eyeing a move above the neutral 50 level, this is usually seen as a change in momentum and could finally help bulls push prices higher.

Immediate resistance rests at 99.57 before the psychological 100.00 level comes into focus.

On the downside, immediate support rests at 98.57 before the lows at 98.00 come into focus.

US Dollar Index (DXY) Daily Chart - June 6, 2025

Source: TradingView.Com (click to enlarge)

Canadian Highlights

• The Bank of Canada held its policy rate at 2.75% for the second consecutive meeting, citing a “softer but not sharply weaker” economy and firmer-than-expected core inflation.
• But signs of real-side weakness are mounting. Merchandise trade cratered in April, with both imports and exports declining.
• May employment was essentially flat while the unemployment rate rose to 7.0% – its highest level since 2016, outside of the pandemic.

U.S. Highlights

• After swelling in the previous three months, the trade deficit narrowed by 55% as pre-emptive inventory building ahead of tariffs appears to have run its course.
• Front-loading behaviour by consumers is also normalizing, with vehicle sales falling 9.3% month-over-month in May.
• Despite the large swings in other data, the labour market’s performance remained steady-as-she-goes. The economy added 139k new jobs in May, only a touch lower than 144k average over the past 12 months.

Canada – The Bank of Canada Holds as Trade Craters and Jobs Falter

This week, the Bank of Canada held its policy rate at 2.75% for the second consecutive meeting, citing a “softer but not sharply weaker” economy and firmer-than-expected core inflation. The Canadian dollar climbed past 73 cents U.S., but lost steam following Friday’s jobs report. Longer term yields were little changed at first, with markets interpreting the hold as marginally hawkish, but had edged higher at the time of writing.

April’s trade data provided very clear evidence of how the U.S. tariffs are affecting Canadian trade. Merchandise trade cratered, with both imports and exports down – but exports more sharply, which will create a notable drag from net trade in the second quarter (Chart 1). Unsurprisingly, the biggest hit came from auto exports, which are now cooling after several months of gains as companies front-loaded shipments. Motor vehicle and parts imports also fell, signalling weaker domestic demand. Beyond autos, trade in consumer goods and industrial machinery & equipment also slumped, shrinking Canada’s merchandise trade surplus with the United States to its lowest level since end-2020. Trade with non-U.S. partners rose, but not enough to offset the losses. Given the trade’s heavy weight in GDP, we expect net exports to push Canada’s economy into contraction in the second quarter.

If the trade report set the melancholy tone, the jobs report drove it home. May employment was essentially flat, with a gain just under 9k. Since U.S. tariffs were first imposed in March, employment is down 16k – a stark reversal from more than a 100k gain in the preceding three months, when optimism due to lower interest rates grew. Manufacturing employment has been particularly hit, marking a fourth consecutive monthly decline, with cumulative losses now amounting to 55k. The unemployment rate rose to 7.0% – the highest since 2016, excluding the pandemic (Chart 2). Since February, the rate has climbed 0.4 percentage points and we expect it to continue rising into the second half of the year, weighing further on real activity.

Arguably, the case for easing existed even before Wednesday’s decision, especially when factoring in collapsing sentiment indicators, which in Canada tend to lead real activity. So why didn’t the Bank cut? The wrinkle is inflation. While headline CPI eased in April thanks to lower oil prices and elimination of the carbon tax, the Bank’s preferred core measures ticked above 3.0%. With tariff-driven price pressures looming, policymakers appear unwilling to risk reigniting inflation or de-anchoring expectations. Indeed, one-year-ahead inflation expectations jumped a full percentage point, while longer-term measures edged up modestly.

This week’s trade and employment data provided more evidence of the very real weakness unfolding in the economy. We expect the Bank will eventually be convinced that further interest rate cuts are needed, with two more cuts likely this year.

U.S. – Job Growth Shows Resilience, But More Volatility Elsewhere

The impact of tariffs continues to distort the economic data, contributing to significant volatility—a trend that was evident this week. Trade flows are a prime example. The trade deficit swelled to an all-time high over the past three months as companies rushed to stockpile goods ahead of anticipated tariffs. However, this pre-emptive inventory build-up now appears to have run its course. April’s trade data showed the deficit narrowed by 55%, as imports of consumer goods and industrial supplies declined to pre-tariff levels (Chart 1).

Consumer spending patterns also appear to be normalizing. Overall spending growth moderated in April, with a slight decline in spending on goods. New vehicles—a major category—are showing signs of stabilization following the pre-emptive shopping sprees seen in March and April. This week’s data suggests that this front-loading behavior has ended, with vehicle sales falling 9.3% month-over-month in May.

Looking ahead, car prices are likely to rise as automakers and dealers pass on at least part of the higher costs to consumers, which will weigh on sales. As noted in our recent report, if tariffs remain in place for the full year, we expect auto sales to decline by 4.0% on a Q4-over-Q4 basis. Financing costs also remain elevated. According to data from Edmunds, the average financing rate on new cars in May was 7.3%—0.7 percentage points higher than in December. A reprieve seems unlikely in the near term, as persistent trade and fiscal policy uncertainty, coupled with a still-resilient labor market, are expected to keep the Federal Reserve on hold. Interest rate futures currently price in just 20 basis points of policy easing by September and only two quarter-point cuts by year-end.

Indeed, today’s payroll report showed that the labor market remained resilient in May. The U.S. economy added 139,000 jobs, slightly above the consensus forecast of 125,000. Smoothing through the monthly volatility, job growth averaged 135,000 over the past three months—just slightly below the 144,000 average over the past year. The unemployment rate remained low, holding steady at 4.2%, while wages continued to rise.

Overall, the large swings in data since the start of the year have made it challenging to assess the underlying health of the U.S. economy. Hard data indicators such as employment and inflation remain resilient. In contrast, soft indicators—including the Beige Book and ISM indexes—suggest the economy is beginning to feel the effects of trade uncertainty. Both the manufacturing and services ISM indexes are now in contractionary territory, while the price subcomponents of both have been trending higher, indicating rising inflationary pressures (Chart 2). This week’s Beige Book also noted that economic activity has declined slightly since the previous report, and that contacts expect prices and costs to rise at a faster pace going forward. Layoffs were mentioned 15 times, up from 10 in March and 6 in January. We continue to expect policy uncertainty to exact a toll on the real economy, but rate cuts are looking further away.

Summary

United States: An Orderly Slowing, for Now

• The latest data signal economic growth is moderating but holding up through May, leaving firms generally still reluctant to let go of workers. Although growth is slowing in an orderly fashion for now, we're only beginning to see the effects of tariffs and look for growth to moderate in the second half of the year.
• Next week: CPI (Wed.), PPI (Thu.)

International: European Central Bank Cuts Rates, Maintains Modest Easing Bias

• The European Central Bank reduced its Deposit Rate by 25 bps to 2.00% at this week's meeting. Its medium-term forecasts envisaged underlying inflation slowing slightly below 2%, implying a mild easing bias, though at the same time ECB President Lagarde said the central bank was "getting to the end of a monetary policy cycle." With Q1 GDP data also showing resilience, we expect the ECB to pause in July, and a final 25 bps rate cut in September.
• Next week: Mexico CPI inflation (Mon.), U.K. Weekly Earnings (Tue.), Brazil CPI inflation (Tue.)

Interest Rate Watch: This Might Take a Minute

• The minutes from the Fed's May policy meeting suggest policymakers still place greater emphasis on risks of cost pass through rather than rising unemployment. Recent survey evidence suggests businesses have or believe they can pass on a decent portion of tariff-related costs, but it may take some time for it to materialize in the hard inflation data. We believe the FOMC will hold at its June meeting and is unlikely to adjust policy until it gains further clarity.

Topic of the Week: Implications of a GSE Conservatorship Exit

• The Trump administration is exploring options to end GSE conservatorship and has expressed intent to take Fannie Mae and Freddie Mac public again. Such a move could bring change to the mortgage market and residential sector of the U.S. economy.

Full report here. 

Summary

May's CPI report will be an important test of the speed and magnitude to which higher tariff rates are being passed along to the consumer. We expect to see only a moderate advance in headline CPI (0.15%) in May as gasoline prices fell on a seasonally adjusted basis and food inflation appeared tame. But excluding food and energy, inflation looks to have firmed on the back of higher goods prices. We estimate the core CPI rose 0.27% in May.

Front-loading of inventories and efforts to avoid alienating customers—especially as it remains to be seen where tariff rates eventually land—are mitigating the early effects of higher import duties on consumer prices. That said, we expect to see the inflationary effects ramp up more in the coming months as the higher tariff environment persists. We estimate core CPI will advance at an average monthly pace of 0.30% in the second half of the year, which would push the year-over-year rate back up to 3.3% in Q4 from April's year-over-year rate of 2.8%.

The Rebound Begins

The May CPI report will test whether April's potential signs of tariffs were early glimmers of inflation effects to come or more typical monthly noise. We estimate consumer prices rose 0.2% (0.15% unrounded), in line with the current Bloomberg consensus. If realized, the increase would push up the year-over-year rate up a tenth to 2.4% and follow soft data in showing that the downward trend in inflation is beginning to reverse (Figure 1). Core categories are expected to drive the advance. Excluding food and energy, we estimate prices increased 0.3% (0.27% unrounded) in May and 2.9% over the past year.

Last month's CPI report showed a modest (0.1%) rise in core goods prices, as a drop in vehicle prices was more than offset by a rise in other core goods categories. Core goods ex-new and used autos matched its largest monthly rise in more than a year in April, with notable strength among household, recreational and IT goods. Whether these categories deliver a repeat performance will help to determine if higher import duties are indeed being passed on to consumers, or if April's strength was merely a function of volatility in the data. The risk of the latter seems higher than usual, as the BLS noted it temporarily reduced data collections in April due to staffing shortages. But the jump in tariff rates over the past few months—collections are up 80% year-to-date through June 4—generates significant potential for April's strength to continue. We expect to see core goods prices rise about 0.25%, with similarly sized gains in vehicles and remaining core goods.

While the changing trade policy environment has put goods inflation back in the spotlight, service-sector disinflation slowly continues. We estimate core services inflation was little changed in May, with a 0.3% monthly increase keeping the year-ago rate at 3.6%. Beneath the steady monthly gain, the drivers are likely to shift. Primary shelter inflation is anticipated to moderate after a couple of months of above-trend gains (Figure 3). But travel-related services prices should rise slightly in May after falling sharply the past three months. Although recent weakness in travel categories highlights more cautious spending by consumers, we expect to see a modest lift in prices amid the early timing of Memorial Day.

Consumers look to have gotten a bit more breathing room when it came to gas prices last month, however. We estimate energy prices declined a little more than 1% last month. Along with a roughly 0.1% rise in food prices, this leads us to expect headline inflation will rise less than the core index in May.

While May's Consumer Price Index is not expected to deliver a stand-out increase, we look for inflation to pick up through the second half of the year. Higher tariff rates lie behind the expected uptrend. In our view, the administration remains committed to meaningfully higher import duties despite the current pause on "reciprocal" tariffs and legal challenges of the current section of the Trade Act used to employ them. Pre-tariff inventory building and hope that the current scale of tariffs may be reduced have helped to restrain cost increases thus far. Consumer-facing companies in particular seem hesitant to immediately pass on the full costs of tariffs due to concerns about the underlying strength of low- and middle-income households. As a result, we expect some of the tariff costs to be absorbed via margins, which remain noticeably higher than before the 2018 trade war. That said, as the higher tariff regime persists, shielding consumers from the costs is likely to become more challenging. We anticipate the three-month annualized rate of core goods inflation to peak around 4%-5% in early fall, a little lower and later than our previous forecast published May 8 ahead of the 90-day pause on "reciprocal" tariffs on China.

Yet, spillovers into the service sector are still expected to be limited. The jobs market is no longer experiencing historic labor shortages, and the weakening backdrop for workers points to employment cost growth slowing further this year. The monthly pace of shelter inflation is close to settling to around a 0.28%-0.30% monthly pace over the remainder of the year, which should help to drive the current year-over-year rate of 4.2% down to 3.6% next spring. Meantime, service providers face the same concerns as companies directly impacted by tariffs about consumers' ability and willingness to spend. As a result, we look for services inflation to recede a bit more throughout the year and to mitigate the increase to goods inflation fueled by tariffs.

Economic data in the coming week will continue to highlight how trade disruptions in its early stages are impacting the Canadian and U.S. economies.

Inflation reports in the U.S. so far have failed to show the impact of tariffs on consumer prices. Core goods inflation in April was the first positive yearly reading since December 2023, mostly due to larger monthly increases earlier this year with a relatively subdued 0.06% month-over-month rise in April.

Nevertheless, tensions are brewing. Used car prices in the U.S. rose 4.4% from a year ago in May, according to the Manheim Used Vehicle Value Index—but it may be taking some time to appear in official consumer price index. Factoring in a slightly firmer monthly increase in core goods prices, we expect headline and core CPI in May to tick up 2.5% from 2.3% in April, and to 2.9% from 2.8%, respectively. Food and energy inflation likely held near the same levels with energy still below year-ago prices and food prices up almost 3%.

In Canada, early reports from Statistics Canada indicate manufacturing sales contracted by 2% in April. Separately reported industry price data shows that three quarters of that decline was likely price related. Oil prices were lower, reducing the nominal value of petroleum sales. But, the early estimate also flagged a softening in auto manufacturing. The decline coincides with 55k, or 2.9% job losses in the sector since January.

Wholesale sales in Canada were also estimated to have declined in April, but retail sales rose by 0.5%, according to StatsCan’s advanced estimate. Going forward, we expect additional softening in Canadian industrial sectors as tariffs reduce U.S. demand for Canadian exports, especially for auto and parts, steel, and aluminum products that are disproportionately targeted by U.S. tariffs. Offsetting some of that weakness will be resilience in domestic services consumption that has broadly held up.

Overall, April’s international trade data confirmed that U.S. tariff increases on Canada, while significant, have been smaller than for other major U.S. trade partners. Barring more significant changes to existing U.S. tariffs, we expect growth in both Canada and the U.S. to slow this year, but expect both to avoid a recession. We anticipate a more pronounced impact on inflation in the U.S. where the average import tariff rate is now substantially higher than in Canada.

Week ahead data watch

We expect Canadian household net worth was little-changed in Q1 with both debt and asset levels holding around levels at the end of 2024. A pullback in equity markets in Q1 likely weighed on household financial asset holdings but house prices edged higher. Household debt service ratios (ratio of debt payments to household disposable income) likely remained elevated, but with little change from Q4/2024 at 14.4%, and still below the 15.1% peak in Q3 2023.

Gold had been climbing steadily despite the overall risk-on sentiment this week. However, this morning’s stronger-than-expected Non-Farm Payrolls report failed to give the safe-haven asset any additional lift.

The rejection at higher levels suggests a lower likelihood of a retest of the all-time highs, which remain at $3,500 - although with this year's volatility, everything is possible.

The Bullion, which was up 3% at its weekly highs is now up only 1.26% - Let's dive into a technical analysis as we stand on the current pivot.

Gold Technical Analysis from Daily to Hourly charts

Gold Daily Chart

XAUUSD Daily Chart, June 6, 2025. Source: TradingView

Gold broke out of its descending daily channel on Monday, supported by early-week US Dollar weakness. However, the streak of consecutive bearish daily candles is undermining momentum toward its all-time highs.

The Daily RSI is neutral though above its 50 level, which still gives it a somewhat bullish bias.

The MA 50 on the daily is still catching up to the rise that occured through the latter part of May.

Standing right at the current pivot of $3,330, we still have to observe if a prolongation of the rejection leads to a re-entering of the Daily Channel.

Gold 4H Chart

XAUUSD 4H Chart, June 6, 2025. Source: TradingView

Gold prices are looking to retest the higher band of the Daily Channel, located at 3,310 as it rejects the 4H MA 20.

One hurdle to look at that may slow a potential down-move within the Channel would be the MA 200 located at the confluence with the 3,300 psychological zone.

Prices which are contained within these 2 key MAs infer some indecision, however we may expect some more clarity throughout the weekly close.

A bounce on the upper channel line will hint to another test of the 3,375 to 3,390 Resistance zone, while a break below the 200 MA points toward the 3,275 to 3,290 Support Zone

Watch the market sentiment, as a further move towards all-time highs in US stock indices may just add to more pressure for the Bullion.

Gold 1H Chart

XAUUSD 1H Chart, June 6, 2025. Source: TradingView

Gold is entering an oversold level as we approach the immediate support zone located between 3,305 and 3,315.

The descent is still fairly strong, therefore watch for any particular switch in market sentiment:

A positive tone may give more strength to sellers, while a risk-off move towards the week-end will provide support; things are still unclear for now but the current mood is positive.

We can observe some harmonic patterns towards the correction in the precious metal as the move up happened after an inverted Head and Shoulders, touching the $3,400 psychological zone before reverting on the Trump-Xi conversation headlines.

We are now observing another potential measured move on the way down (purple squares).

Also watch for potential consolidation around the 3,330 pivot.

Safe Trades!

• US inflation may edge up in May but unlikely to dent Fed rate cut bets.
• Focus also on trade negotiations and US appeals court tariff decision.
• Chinese trade data eyed amid tariff war.
• UK employment and GDP also on the agenda.

Will US CPI add to Fed rate cut hopes?

Expectations that the Federal Reserve may cut interest rates by more than 50 basis points received a boost over the past week following a weak batch of economic indicators that pointed to a slowing US economy. The first signs of cracks from President Trump’s global trade war appear to be forming within the labour market, manufacturing, consumer spending as well as the broader services sector.

However, after the recent months’ declines in the key inflation metrics, investors are hoping that the Fed will not hesitate to cut rates now that the economy is possibly stumbling. Yet, there’s also a case to remain on pause for a while longer, at least until after the July 9 deadline for reciprocal tariffs where there should be more clarity about potential trade deals.

With inflation still hovering above the Fed’s 2% target, policymakers may not want to make the mistake of lowering borrowing costs prematurely, as a fresh flareup in trade tensions cannot be ruled out at this stage.

Wednesday’s CPI report will put the improved rate cut optimism to the test as it might show a stalling in the recent disinflation trend. According to the Cleveland Fed’s Nowcast model, headline CPI is estimated at 2.4% y/y in May, up from 2.3% in the prior month, while core CPI is projected to stay unchanged at 2.8% y/y.

Producer prices for the same month will follow on Thursday and will also be important in gauging underlying price pressures. Wrapping up the week will be the University of Michigan’s closely watched preliminary consumer sentiment survey, which includes consumer inflation expectations.

Any softness in the incoming data would likely further bolster rate cut bets, adding to the US dollar’s woes, but shares on Wall Street would probably cheer a downside surprise and head higher.

Tariff ruling and trade deals might also set market tone

However, it’s not going to be just inflation data driving sentiment next week. The US Court of Appeals could decide in the coming days whether to permanently overturn the US International Court’s ruling to block Trump’s reciprocal tariffs. The appeals court will have heard from both sides by June 9, but in either outcome, the case could still end up in the Supreme Court, delaying a final ruling on the matter.

Still, should in the meantime the appeals court rule in favour of the Trump administration, it won’t change the status quo and the market impact will be negligible. But should it side with the lower court that the reciprocal tariffs are unlawful, there could be a limited boost to risk appetite.

Investors will also be keeping an eye on any developments in the trade negotiations as it’s not just the US President that’s getting impatient about the slow progress. Doubts are creeping into the markets about how quickly the US will be able to reach trade agreements with its main trading partners, as there’s just one month left until the 90-day pause on reciprocal tariffs expires on July 9.

Japan and India remain the most likely countries to next reach a trade deal with the White House, especially Japan, which is hoping to conclude talks before Prime Minister Ishiba meets with Trump on the sidelines of the G7 summit in Canada that starts on June 15. However, a surprise deal is also possible with the G7 hosts, amid reports that Canadian Prime Minister Carney has been in direct talks with Trump to settle the trade row between the two countries.

Tracking the fallout of the US-China tariff war

But as far as trade talks with China are concerned, there is some ambiguity about how much progress is being made despite the call this week between Presidents Trump and Xi. At this point, the only real progress is that there is an open dialogue between Washington and Beijing and that Trump will soon travel to China on a state visit. But an actual deal could be months away, with more setbacks likely until there is a final agreement, and this can only mean more bumps on the road for markets.

Next week’s trade figures out of China could slightly smoothen the ride, however, as the truce struck with the US on May 12 to temporarily lower the tariffs on each other possibly lifted exports during the month. Though, it might be difficult to get a clear picture given that the tariff relief came during the middle of the month.

The May trade data is out on Monday alongside the consumer and producer price indices for the same period.

Equities and the Australian dollar are likely to rise the most from a strong bounce in Chinese exports and imports.

Pound aims high, might shrug off UK data

Over in the United Kingdom, Prime Minister Keir Starmer’s success in being the only leader to sign a preliminary trade pact with America hasn’t earned him much praise on his home turf. Starmer’s Labour government is under fire by both Labour MPs as well as voters for making steep cuts to some benefits, not doing enough to stimulate the economy and for not negotiating a better deal with Trump.

Financial markets are somewhat more impressed of his handling of the economy, as the pound is trading at more than three-year highs, testing the $1.36 handle.

Nevertheless, despite the UK economy defying the predictions of doom and gloom, there are some worries about the labour market. The government’s hike in employers’ national insurance contributions on top of the rise in minimum wage and demands of higher pay, has overburdened companies with higher costs.

The employment report for the three months to April will be watched on Tuesday for any signs of increased layoffs. The latest wage growth numbers will also be scrutinized as the very slow cooling in pay pressures is keeping the Bank of England on the cautious side when it comes to its readiness to cut rates.

There will be more data on Thursday with the release of the April GDP print, including the sectoral growth in services, manufacturing and overall industrial production.

Unless the jobs and GDP figures are very strong or very poor, reaction in the pound will probably be muted, with broader risk sentiment and the dollar’s own performance being bigger drivers.

We published our latest economic forecasts this week, with notable downgrade to the US outlook but relatively stable view for euro area growth. Arguing that uncertainty is exceptionally high might feel like a cliché these days, but the forecasts are naturally subject to significant tariff uncertainty. As a base case, we assume that tariffs will remain near current levels in the foreseeable future, with the US average trade-weighted tariff rate hovering around 15%. This means we think the 10% universal rate as well as the current product-specific tariffs will remain in place, but that majority of the so-called 'reciprocal tariffs' will not be reinstated. We foresee euro area GDP growth at 0.9% in 2025 (unchanged), US at 1.6% (from 2.3%) and China at 4.7% (unchanged). Read more from Nordic Outlook - Normalisation with tariff risks, 4 June.

The ECB cut its policy rates by 25bp as widely expected. Lagarde delivered a more hawkish rhetoric than markets had anticipated. She underscored that the central bank is now well positioned for the current environment, and that ECB is 'getting to the end' of its cutting cycle. Euro area inflation slowed down to 1.9% y/y in May and ECB adjusted their inflation forecast to just 1.6% for 2026, but Lagarde downplayed its significance and emphasized the shift mostly reflected lower energy prices and stronger EUR FX rate. We adjusted our ECB call and now foresee only one final rate cut in September, when previously we expected cuts in both July and September. Short-end rates ticked somewhat higher as markets pulled back their rate cut expectations as well. Read more from ECB review: In a good position, close to or at the end, 5 June.

Market sentiment has generally remained calm despite Trump's increased 50% steel and aluminium tariffs coming into effect this week. Equities ticked modestly higher on both sides of the Atlantic while long-end bond yields stabilized lower. EUR/USD shifted up above 1.14, and we think the persistent distrust towards the US combined with structurally slowing growth will take the cross towards 1.20 in one year's time.

Incoming macro data has been to the soft side, with both US ISM manufacturing and services indices falling short of expectations. The services index showed a concerning combination of weaker new orders yet still increasing price pressures. The stagflationary tone offers no clear guidance for the Fed. On the other side of the Pacific, China's Caixin manufacturing index also fell sharply in May to 48.3, from 50.4. Read more from our latest China Headlines, 6 June.

Next week will be relatively light in terms of macro data. We think US CPI inflation remained steady in May at +0.2% m/m SA in both headline and core terms. University of Michigan's preliminary June consumer sentiment survey will provide markets with clearer sense of inflation expectations. The revised May survey showed that inflation expectations had declined after the US-China trade deal was announced. From the euro area, the Sentix indicator will offer a sense of how investor confidence has evolved in early June. The indicator rebounded sharply in May following the post-liberation day plunge in April and we think there is further room for a small increase in June.

Full report in PDF. 

Key insights from the week that was.

In Australia, Q1 GDP confirmed that the economy started the year on a weak footing, rising just 0.2% to be up 1.3% over the year. Compositionally, the roll-off of energy rebates saw a portion of spending re-allocated from governments to households; but overall, the pulse in the domestic economy remains faint. Having just experienced one of the most prolonged and deep contractions in real per capita disposable incomes on record, households continue to preference rebuilding savings buffers over discretionary spending. While public spending remains elevated, the support it offers to economic growth is starting to wane as large infrastructure projects move towards completion. Growth in housing construction was a bright spot amongst the GDP detail, but new business investment was mixed – non-residential construction accelerating as equipment spending fell to its lowest level in two years.

Prior to the GDP release, the RBA Minutes made clear that current trends in domestic economic conditions alone justified a further reduction in policy restrictiveness in May, with the added downside risks from global developments raising the possibility for a 50bp cut (which was ultimately dismissed). With growth now having stalled at 1.3%yr over the past six months, it is important to consider how the RBA might reach its terminal policy rate and where that terminal policy rate might be. This week’s essay from Chief Economist Luci Ellis explores these questions.

Coming back to the GDP detail, the external sector proved to be a slight drag on activity, with real net exports detracting –0.1ppts from Q1 GDP. Highlighting the volatility at present, weather-related disruptions to coal production and port activity more than offset the gold export rush, while travel-related services exports surprised materially to the downside. Some of these goods trade dynamics started to unwind over April, but we are likely to see further volatility in coming months.

Before moving offshore, it is worth noting that the latest Cotality (formerly CoreLogic) data showcased another bumper gain in house price growth, up 0.5% in May. Seasonality may be overstating the scale of recent gains; regardless, the data reflects a clear rapid response to RBA rate cuts which will be tested against affordability in coming quarters. For more detail on our views around the housing market, see our latest Housing Pulse.

In the US, the May ISM reports painted a sombre picture of the economy. The manufacturing index fell 0.3pts to 48.5pts, with most components below the 50 expansion/contraction divide. Of particular note, the production and new export orders sub-indexes both posted sizeable falls and remain more than 10pts below their pre-COVID 5-year average. Both the prices and supplier deliveries sub-indexes rose strongly, however, reflecting the impact of tariffs – increased import costs and a hoarding of inputs ahead of feared tariff escalation. On the services side, the headline index surprised, falling from 51.6pts to 49.9pts. In the detail, there was a substantial drop in the new orders, order backlog and export components. On the bright side, the services employment index regained momentum to 50.7, consistent with balance between labour demand and supply. The Federal Reserve’s latest Beige Book highlighted similar concerns over prices and uncertainty regarding the outlook for both activity and the labour market.

Further north, the Bank of Canada maintained its policy rate at 2.75% at their June meeting, seeking further information on the implications of US trade policy for the Canadian economy. Post-meeting communications noted that the labour market has weakened, particularly in trade-related sectors; however, inflation has been modestly stronger than anticipated. Activity growth has shown resilience amid uncertainty, however; although this is partly due to exports and inventory building to avoid tariffs. The Bank of Canada noted they intend to be less forward looking in the months ahead, amid considerable uncertainty over trade policy and with the policy rate near neutral.

Also facing considerable uncertainty from offshore, the European Central Bank cut its deposit rate by 25bps to 2.0%. Revised forecasts show inflation is now anticipated to be 2.0% in 2025 then 1.6% in 2026 (both 0.3ppts below the prior forecast) and 2.0% in 2027. Their GDP forecasts were broadly unchanged, with growth expected to come in at 0.9% in 2025, 1.1% in 2026 and 1.3% for 2027. Accompanying these baseline forecasts were staff scenarios. A “further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections. By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections.”

In terms of the path ahead, President Lagarde emphasised the uncertain terrain the ECB are navigating and consequently that they will “follow a data-dependent and meeting-by-meeting approach” in determining policy. That said, President Lagarde mentioned the central bank was in a "good place" and that "they were getting to the end of a monetary-policy cycle". On balance, the hawkish tone on the inflation outlook increases the probability of a pause in interest rate cuts at the next meeting in July, but it does not rule out a further cut in September or later in the year, particularly if near term uncertainty and tariff effects prove to be a bigger issue than the ECB expects.