Gold steadied after a two-day climb as traders focused on tariff threats from President Donald Trump and the outlook for US monetary policy https://t.co/3yiTsiOOKA ...

Monetary Policy - Mexico's central bank indicated a likely deceleration in the pace of interest rate cuts [1] - The signal follows last month's 0.5 percentage point reduction [1]

Group 1: Monetary Policy Review - The Federal Open Market Committee (FOMC) is reviewing its monetary policy framework, focusing on assessing risks and uncertainties that impact policy strategy and communication [3][4][5] - Participants emphasized the importance of effective communication regarding risks and uncertainty to enhance transparency and accountability in monetary policy decisions [5][6] - The Committee plans to continue discussions on enhancing communication tools after completing the review of its Statement on Longer-Run Goals and Monetary Policy Strategy [7] Group 2: Financial Market Developments - During the intermeeting period, policy expectations and Treasury yields rose modestly, while credit spreads narrowed and equity prices increased [8] - The median respondent's expectations for real GDP growth and personal consumption expenditures (PCE) inflation for 2025 showed some recovery from previous declines, although growth expectations remained lower than before April [8][9] - Nominal Treasury yields increased by 15 to 20 basis points, reflecting market participants' growing fiscal concerns [9][10] Group 3: Economic Situation - Consumer price inflation was estimated at 2.3% in May, with core PCE inflation at 2.6%, both lower than at the beginning of the year [19] - The unemployment rate remained low at 4.2% in May, with solid labor market conditions and a steady increase in nonfarm payrolls [20] - Real GDP was expanding at a solid pace in the second quarter, with indicators suggesting strong consumer spending and business investment [21][22] Group 4: International Trade and Economic Outlook - U.S. imports declined sharply in April following the introduction of tariffs, while exports firmed, leading to a rebound in trade flows [23] - Economic growth abroad picked up in the first quarter but showed signs of slowing in the second quarter due to lower exports to the U.S. and uncertainty in global trade policies [24] - Inflation abroad remained near central bank targets, with some countries experiencing renewed inflationary pressures [25][26] Group 5: Labor Market and Business Sector - Labor market conditions were solid, with participants noting a potential softening in hiring due to elevated uncertainty [47] - Business investment remained cautious, with firms proceeding with existing projects but hesitating to start new ones amid uncertainty [50] - Financing for larger investment projects was readily available, although some sectors, like agriculture, faced challenges from low crop prices and high input costs [50][33] Group 6: Monetary Policy Actions - The FOMC decided to maintain the target range for the federal funds rate at 4¼ to 4½ percent, assessing incoming data and the evolving economic outlook [57][62] - The Committee is committed to supporting maximum employment and returning inflation to its 2% objective while continuing to reduce its holdings of Treasury securities and agency debt [62][63] - Participants agreed to monitor the implications of incoming information for the economic outlook and adjust monetary policy as necessary [58]

Market Volatility and Economic Outlook - The market has become accustomed to policy twists and turns, anticipating quick reversals to more favorable conditions [2] - Volatility is currently painful, but a settling down of policy could allow positive economic forces to take over [3] - The economy is in good shape with low unemployment, steady employment, and gradually decreasing inflation [5] - Fiscal policy is stimulative, and monetary policy is increasingly accommodative, creating tailwinds for the economy and markets [6][7] - The Federal Reserve (Fed) is correct in waiting for more evidence of weakening employment or reduced inflation before cutting interest rates [8] - There is a belief that there will be a couple of interest rate cuts this year, with the probability of three cuts being greater than one [8][9] Federal Reserve and Political Influence - The market has generally received Jay Powell well, despite initial concerns about his non-traditional economist background [15] - Jay Powell has done an excellent job, especially considering the challenges of COVID-induced inflation [16][17] - Political pressure on the Fed continues, raising questions about the next Fed chair and potential for a more dovish approach [9][11][12][13] - Any future Fed chair must build consensus among the Open Market Committee members, requiring a balanced approach [14] Political and Economic Divides - The current budget and tax bill primarily benefits wealthier individuals, potentially not resonating with the broader electorate [19] - Affordability is a key issue, as many people are not benefiting from the economy's performance to the same extent as those at the top [23] - New York City needs to focus on job creation, affordable housing, education, and public safety to maintain its standing as a financial capital [26][27][28]

Investment Rating - The report maintains a high conviction level on several currency pairs, including short CNH against an equal-weighted basket (EUR, AUD, KRW) at 4/5, long EUR/INR at 4/5, and long USD/HKD outright at 4/5 [6][10][16] Core Insights - The report suggests a bias towards a weaker USD, despite some short-term headwinds from stronger-than-expected US nonfarm payroll data [8][12] - Key focus points include potential changes in US trade agreements and the influence of Fed Chair Powell's position on USD strength [11][20] - The report highlights the importance of monitoring developments in US tariffs, particularly concerning Japan and other major trading partners [19][20] Summary by Sections Asia FX Strategy - The conviction level on short CNH against an equal-weighted basket has been raised to 4/5, targeting a 4% return by the end of July [11] - Long EUR/INR is favored with a conviction level of 4/5, driven by RBI's bias to maintain FX reserves and local growth slowdown [17] - Short USD/TWD is maintained at a high conviction level of 4/5, with expectations of continued foreign equity inflows and robust local fundamentals [15] G10 FX Strategy - Long EUR/GBP is retained at a conviction level of 4/5 due to fiscal pressures on GBP and potential for further deterioration in economic data [21] - Short USD/JPY recommendations are maintained, with expectations of downward pressure on USD against JPY amid rising tariff risks [19][20] - The report indicates a modestly positive outlook for AUD, with expectations of a rate cut from the RBA [22] Asia Rates Strategy - Conviction on pay 10y HK IRS is raised to 4/5 due to increased HKMA intervention and expectations of upward pressure on USD/HKD forwards [25] - The conviction on pay 5y outright in China is maintained at 4/5, while the conviction on 2s5s steepener is reduced to 3/5 [26] - In India, a 2y NDOIS receive position is maintained, with limited near-term catalysts expected [27]

Investment Rating - The report indicates a modestly richer range for US yields, with expectations for 2-year and 10-year yields to finish the year at 3.45% and 4.20% respectively, down from previous forecasts of 3.85% and 4.50% [2][5]. Core Views - The revised Fed baseline suggests earlier cuts and a lower terminal rate, leading to a lower range for US yields across the curve. The expectation for 10-year US yields is now 4.20% at the end of 2025, compared to 4.50% previously [1][2]. - The report anticipates that the improved macro outlook will compress risk premia throughout the Gilt curve, with a forecast of 10-year Gilts at 4.25% by year-end [19]. - European duration is expected to trade weaker over time, with a 10-year Bund yield forecast of 2.8% for end-2025, driven by fiscal support from Germany [19][11]. Summary by Sections US and Canada - The firmer than expected June jobs report has led to a modestly richer range for US yields, with the revised forecasts reflecting a dovish stance compared to market pricing [2][5]. - The risks associated with diminished central bank independence and fiscal pressures are limiting factors for long-end richening [2]. Europe - The report maintains Bund yield forecasts at 2.8% for end-2025, with expectations that fiscal support will push yields higher as growth expectations improve [11][19]. - The ECB's strategy assessment indicates a need for forceful policy action to address inflation volatility, with limited guidance on near-term policy [11]. UK - The report notes ongoing fiscal fragilities in the UK, but front-end longs are expected to remain relatively well protected despite recent volatility in the Gilt market [16][19]. - The expectation is for 10-year Gilts to rally towards 4.25% by year-end, supported by bullish spillovers from the US [19]. Japan - The report suggests that the BOJ normalization cycle will be prolonged, with a medium-term neutral rate of 1.25-1.5%, impacting yields across the curve [19]. General Market Dynamics - The report highlights that a benign path to lower short-term rates can improve the economic appeal of US Treasuries, despite downward revisions to US yields [1][4]. - The potential for deeper cuts to support lower yields is acknowledged, with a steeper curve expected in spot terms [4][7].

Investment Rating - The report maintains an overall positive outlook on emerging market currencies while being underweight on emerging market sovereign credit and maintaining a market weight on local rates and corporates [7]. Core Insights - The report projects a first Fed cut in December 2025, with expectations for 2-year Treasury yields to reach 3.50% and 10-year yields to reach 4.35% by year-end 2025 [11][13]. - Global oil demand is tracking year-over-year growth of 410 thousand barrels per day (kbd), but is 130 kbd lower than the forecasted expansion for June [7]. - The dollar smile phenomenon persists, indicating that the dollar's strength is contingent on the nature of events driving defensive behavior [7]. US Rates - Front-end yields have declined to 2-month lows, influenced by administration criticism of the Fed, with a healthy labor market indicated by June employment data [3][16]. - Tactical positions include entering 2-year shorts and adding steepeners in the 5s/7s sector while hedging with flatteners in the 10s/30s sector [19][21]. International Rates - Yield curves have bull steepened across most developed markets, with US rates outperforming due to a sharp drop in oil prices and dovish Fed commentary [4][47]. - Euro rates have bear steepened, driven by updated German fiscal numbers and NATO defense spending agreements [4][47]. Commodities - Jewelry demand weakness is not expected to significantly impact gold prices, although vigilance is advised for potential shifts to other metals [7]. Currencies - The report maintains a bearish stance on the USD, projecting key targets for various currency pairs, including EUR/USD at 1.20-1.22 and GBP/USD at 1.42 [66][85]. - The dollar's weakening is anticipated due to moderation in US growth and supportive fiscal and monetary policies outside the US [66][71]. Emerging Markets - The report suggests staying overweight on emerging market currencies while being underweight on emerging market sovereigns, with a market weight on local rates and corporates [7]. - US policies are expected to dominate the emerging market outlook in the second half of the year, with a slower growth, no-recession base case [7].

Monetary Policy Outlook - The World Bank anticipates Thailand's monetary policy to become "more accommodative" in the current year [1] Economic Uncertainty - Mounting external and domestic uncertainty are factors influencing the expected monetary policy shift [1]

US Political & Economic Landscape - The US political system is perceived to be transforming, with concerns about slavish devotion to a leader and Washington potentially turning into Pyongyang [1] - There's a sense that the US is politically not the same country it was a few years ago, impacting the entire international system [1] - Public opinion is largely negative towards current legislation, even with deliberate obfuscation of its impact [25] - The US stock market may be detached from the economic reality, potentially driven by corporate profit expectations in a favorable regime [15] International Order & Global Economy - The traditional global order is being tested, with the US potentially abdicating its leadership role [1][3] - The world may be moving towards a "world order minus one," where the US is excluded due to its current political climate [3] - There's an opportunity for other countries, like China and the EU, to take on leading roles in trade, climate action, and global governance [5][6][7] - The US dollar has fallen about 10% since the start of the year, a phenomenon typically seen in emerging markets [17] Risks & Uncertainties - There are concerns about the stability of the US system, with potential for unfair elections and the creation of a massive secret police force [2] - The US is potentially setting itself up for a financial crisis due to deregulation, irresponsible fiscal policy, and pressure on the Federal Reserve [31][33] - There's a risk of runaway inflation if the Federal Reserve becomes too politicized and attempts to goose up the economy for political gain [34]

USA: Powell Reiterates Wait-and-See Approach to Policy, Does Not Comment on July Cut BOTTOM LINE: Chair Powell said the economy was "healthy overall" and that "as long as the US economy is in solid shape, we think the prudent thing to do is to wait and learn more, and see what [the tariffs'] effects might be." When asked about whether it was too soon for the Fed to start cutting in July, Powell said he "wouldn't take any meeting off the table or put it directly on the table." Powell said that the inflation ...