AUD Higher on Rate Hold Surprise

CURRENCY FUTURES

The USD index is little changed after finishing Monday higher after President Trump announced updated tariff rates on 14 countries that have yet to secure trade deals with Washington. The list includes major exporters such as Japan and South Korea, both of which will face 25% levies. Trump also signed an executive order extending the reciprocal tariff deadline to August 1 from July 9.

Euro futures are little changed as investors await further clarity on the US tariff picture ahead of a light week of economic data for the eurozone. There are reports that the US had proposed a deal to the EU maintaining a 10% baseline tariff, with exemptions for key sectors such as aircraft and spirits. However, Washington gave no indication it would extend exemptions to politically sensitive areas such as cars, steel, aluminum, or pharmaceuticals, despite EU requests. Markets now expect only one additional rate cut from the ECB this year. ECB officials have signaled that rates will likely be held steady at this month’s meeting following eight consecutive cuts since June 2024. With inflation aligning with the 2% target, policymakers are taking a cautious stance amid persistent global trade tensions and the euro’s recent appreciation.

British pound futures are lower as growing concerns over the UK’s fiscal outlook pressure the sterling. Chancellor Rachel Reeves hinted at possible tax hikes in the autumn budget to address a public finance gap. UK monthly GDP data is set to be released on Friday. The latest release showed the economy contracted by 0.3% month on month in April. Industrial production data for May is due to be published on Friday as well as UK trade balance data. UK inflation remains sticky. Core inflation has shown little movement over the past year, causing concern among BoE officials and complicating rate cut decisions. UK money markets are pricing in a 66% chance of a rate cut in August.

Japanese yen futures are lower after following President Trump’s decision to place a 25% tariff on Japanese goods effective on August 1. Prime Minister Shigeru Ishiba said Japan will keep trying to strike a trade deal with the US that benefits both sides. Japan is unlikely to sign a trade deal with the US unless it includes a big cut to tariffs on autos. Automobiles account for nearly 30% of Japan’s US-bound exports and are central to employment and industrial output. On Friday, the Bank of Japan is set to conduct outright purchases across four segments of the Japanese Government Bond yield curve, including JGBs with maturities of more than five years up to 10 years and those exceeding 25 years. These purchases are expected to help support the domestic bond market.

Australian dollar futures are higher following the Reserve Bank of Australia’s surprise decision to hold rates steady, leaving the benchmark interest rate at 3.85%. In a statement, the RBA said it wanted to wait for more data on inflation to confirm that it remained on track to reach 2.5%. The on-hold decision follows earlier reductions in May and February and comes as core inflation has fallen back to around the top of the RBA’s 2% to 3% target band after a multiyear effort to restrain growth in prices. The RBA also said it remained cautious about the economic outlook regarding aggregate demand and supply in the country. Interest-rate reductions are widely expected to continue through the remaining months of 2025, with most economists expecting the benchmark rate to end the year closer to 3.0%.

STOCK INDEX FUTURES

Stock index futures are mixed after finishing the session Monday lower following President Trump’s updated tariff rates on 14 countries that have yet to secure trade deals with Washington. Reports also indicated that the US has proposed a deal to the EU that would retain a 10% baseline tariff, with exceptions for sensitive sectors such as aircraft and spirits. Investors found some relief in the extended timeline for negotiations, as the new tariffs are not set to take effect until August 1, allowing more time to reach agreements. President Trump also threatened an additional 10% tariff on countries that align themselves with the BRICS group.

Last week the US announced a trade deal with Vietnam, which would lower the tariff on Vietnamese goods imported to the US from 46% to 20%, while US goods entering Vietnam would not face any levies. Additionally, any Vietnamese goods would face a higher 40% tariff on any “transshipping,” where goods shipped from Vietnam originate from another country, like China.

Thursday’s strong jobs report helped boost the S&P and Nasdaq to all-time closing highs; with equities at record levels, investors are worried that any negative news on the trade front could trigger volatility.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, with prices lower at the long end, with the 10-year yield above 4.4% on Tuesday, a two-week high, as investors weighed the latest trade developments and economic data.

Supply this week is also in focus with the Treasury due to sell $58 billion in three-year notes later on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday. Demand for the longer-dated debt will likely be supported by recent comments by Bessent that he does not plan to increase the auction sizes of the longer-dated debt at current interest rates. That will leave the Treasury more dependent on Treasury bill issuance to finance its operations. The Treasury is expected to ramp up net T-bill issuance in order to replenish its cash balance closer to $850 billion by the end of the quarter. Concerns over a worsening budget deficit are viewed as largely priced in for now.

Yields jumped across the curve last week following the better-than-expected jobs report for June, which dulled any hopes for a July rate cut from the Fed. Nonfarm payrolls grew by 147,000, although government employment (+73,000) accounted for nearly half of the growth. The solid jobs report added to expectations that the Fed will likely not cut rates at its July meeting, further reinforcing its wait-and-see approach to monetary policy while they await further clarity on the impact of tariffs on prices.

The 10-year Treasury yield is 4.42%, and the 30-year yield is 4.96%. The spread between the two- and 10-year yields jumped to 50 bps from 48 bps Monday.

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