The Dollar was granted some breathing room near YTD lows

Markets

US investors were in a good mood as they returned from the long Memorial Day weekend. US Treasury Secretary Bessent floated the prospect of some big (Asian) trade deals in coming weeks, while the original July 9 deadline is back in play for US‐EU negotiations. An unexpectedly strong surge in May consumer confidence helped lifting spirits. The headline index rebounded from 85.7 to 98, the best level since February. Especially the expectations index (72.8 from 55.4) contributed to the leap higher. Consumers cited the temporary reduction in China tariffs, lower gas price and easing inflation while fewer of them now see a recession this year. Average inflation expectations 12 months ahead eased from 7% to 6.5%. US stock markets rallied 1.8% (Dow) to 2.5% (Nasdaq) into the close. Tonight’s Q1 Nvidia earnings have the potential to unlock the final part of a full retracement of this year’s losses back to YTD/all‐time highs. The market relief helped some short-term rebound action at the very long end of the curve. The US curve bull flattened with yields 1.1 bp (2‐yr) to 8.6 bps (30‐yr) lower on the day. There was similar outperformance at the very long end in Japan and the UK earlier on the day. The Japan’s ministry of finance sent a questionnaire to an unusual wide group of market participants and at an unusual time regarding the appropriate issuance amounts for government bonds. This is taken as a sign of the government seeking to stabilize the recent rout in Japanese bonds. In the UK, the debt management office indicated that it is shifting to shorter‐term borrowing. In FX space, the dollar was granted some breathing room near YTD lows with the trade-weighted greenback moving from 99 towards 100. EUR/USD copied the, technically insignificant move from 1.14 to 1.13.  

The correction lower in very long Japanese government bond yields is already running into trouble this morning after an auction of 40‐yr government bonds met with weak demand. It highlights the fragility of any such moves with worries on public finances resulting in a sell‐the‐uptick pattern for now. Today’s eco calendar contains ECB inflation expectations (1y, 3y), the Richmond Fed manufacturing index and minutes of the previous FOMC meeting. We don’t expect them to move markets in a profound way. Later this week (Friday), US PCE deflators, Japanese (Tokyo) CPI) and German consumer prices are worth watching.  

News and views

Hungary’s central bank (MNB) kept the policy rate unchanged at 6.5% yesterday. It remains highly focused on inflation. Price rises in April slowed to 4.2% (headline) and 5% (core), depending on the gauge, but underlying dynamics are worrying. Government profit caps artificially suppressed food prices and market services’ monthly repricing was well above average. That points to higher inflation throughout the year. Risks surrounding the inflation outlook are substantial and therefore continue to warrant a careful and gradual approach to monetary policy. Hungarian swap yields rose a few basis points but that move was unrelated to the policy decision. The forint closed more or less unchanged around EUR/HUF 403.7.

The Reserve Bank of New Zealand went ahead with its easing cycle, lowering the key rate from 3.5% to 3.25%. Chief economist Conway said they now entered the neutral zone in a sign of the cycle nearing its end. The May policy report indicates one more rate cut with the chance of another. The decision was not a unanimous, with one member arguing for a hold with increased inflation expectations as one of the reasons. Inflation is projected to rise to 2.7% in 2025Q3 before returning near 2% from 2026. Previous rate cuts as well as elevated export prices should support the economy, even as increased global tariffs are expected to slow global economic growth. The economy should expand by 1.5% in the year through March 2026, compared to the 1.8% projected in February. The kiwi dollar didn’t hold on to kneejerk gains (NZD/USD 0.595). Swap yields do rise up to 11 bps at the front end of the curve.

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