UK GDP Figures Fuel Rate Cut Bets

CURRENCY FUTURES

The USD index is higher as President Trump announced more tariffs against other countries, including Canada. Minutes from the Fed’s June meeting showed that the downwardly revised US economic outlook led foreign investors to hedge their currency risk, adding pressure on the dollar. The Fed did note that foreign investors are still holding onto US investments and there has been no sign of a major pullback and that the sensitivity of the foreign exchange value of the dollar to domestic economic surprises had not changed.

Euro futures are little changed as markets await any news regarding a trade deal between the EU and US. President Trump said that he plans to impose a 15%-20% tariff on most trading partners, casting some doubt that the EU could receive a 10% tariff. The IMF reported that the share of euros in global currency reserves rose from 19.8% in 2024 to 20.1% in the first quarter of 2025, the highest level since 2022. 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 fell to their lowest level in over two weeks after data showed that the economy contracted for the second month in a row, fueling rate cut expectations. GDP shrank -0.1% in May, following a -0.3% drop in April and missing expectations of a 0.1% growth. Industrial production also contracted -0.9% month-over-month in May, well below estimates of a -0.1% contraction. Meanwhile, trade balance data showed a trade deficit of $21.69 billion for May. The slowdown is likely to further cool a weakening jobs market, which would in turn put pressure on consumer spending. Payrolls fell 109,000 in May, the largest drop since the onset of the pandemic in 2020. Investors are betting that the BoE will reduce its key interest rate in August, with the recent data making it more likely that the central bank will cut rates to support growth. Lower economic growth would likely weaken tax revenues and make it more difficult for the government to meet self-imposed budget rules. These dynamics add further concern that UK public finances are in a relatively vulnerable position and facing mounting risks.

Japanese yen futures are lower, nearing three-week lows, as the dollar gained following President Trump’s decision to place a 25% tariff on Japanese goods effective on August 1. Export-dependent Japan stands out among major US trading partners as being the farthest from a deal, while the yen has continued to slide. Speculation that opposition parties will gain seats in Japan’s upper house and push for more fiscal stimulus has sent Japanese government bonds lower this week, causing a spike in long-term yields and further pressure on the yen. Japan is unlikely to sign a trade deal with the US unless it includes a big cut to tariffs on autos and agriculture. Automobiles account for nearly 30% of Japan’s US-bound exports and are central to employment and industrial output.

Australian dollar futures slipped in the overnight session on dollar strength, as the currency has been supported by the RBA’s decision to hold rates and a jump in US copper prices. 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 fell in the overnight session after President Trump threatened Canada with a 35% tariff while floating higher blanket levies of 15%-20%. Markets have largely shaken off Trump’s renewed tariff threats this week, which have resulted in nearly two dozen letters to trading partners dictating the duties their country’s imports will face beginning Aug. 1.

President Trump also announced a 50% tariff on copper imports into the US and a 200% tariff on pharmaceutical tariffs to reporters during a cabinet meeting on Tuesday. Trump suggested there would be a grace period of about a year for drug companies to move manufacturing to the US before they face steep tariffs. Pharmaceutical stocks dipped following the news but remained in positive territory. Trump also said he would announce tariffs on semiconductors, though he did not specify a rate or date.

The prolonged trade talks have extended uncertainty for businesses in the US, resulting in businesses holding back investment decisions in the US. Fed meeting minutes confirm this, as board members reported that business contacts had indicated that firms were continuing ahead with existing investment projects but that heightened uncertainty was making them cautious about beginning new projects. The new extension has offered some optimism that President Trump may be flexible towards some trade deals as time progresses. The effective tariff rate, calculated with the first round of letters, would be around 17.6%, the highest level since 1934.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve after President Trump announced 35% tariffs on Canadian goods in what has been a volatile week for the bond market, marked by heightened trade tensions and shifting policy expectations. Thursday’s 30-year bond auction was solid, although bidding was not very aggressive. The bond caught a yield of 4.889%, while the bid-to-cover ratio was 2.38, below the recent average of 2.44. Indirect bids at 59.8% fell below the 66.9% average, but direct bids at 27.4% beat the 19.8% average, which left dealers with a below-average take at 12.80%.

Treasury Secretary Scott Bessent said that he does not plan to increase the auction sizes of the longer-dated debt at current interest rates, which could provide support for longer-term debt prices. That will leave the Treasury more dependent on short-term 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.

Meeting minutes from the FOMC’s meeting in June showed that only a couple of members of the board would be open to considering an interest rate cut at the July meeting, data dependent. Unsurprisingly, the entirety of the board viewed it as appropriate to leave rates unchanged at the June meeting. The minutes also showed that the board was still uncertain as to the level and lasting impacts of tariffs effect on inflation, although it was certain that increased tariffs were likely to put pressure on prices. Longer-term inflation expectations continued to be well anchored. The board still expects there to be two 25 bps rate cuts both this year and next year.

President Trump reiterated pressure on Fed Chair Powell for sharp interest rate cuts. The president said the fed funds rate is at least three points too high. President Trump is also continuing his search for a new Fed chairman and has indicated he wants someone aligned with his views on monetary policy. Likely candidates could be Scott Bessent, Kevin Warsh, and Kevin Hasset.

The 10-year Treasury yield is 4.38%, and the 30-year yield is 4.90%. The spread between the two- and 10-year yields is 49 bps.

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