Japanese money markets see just a 50% chance the BoJ will resume rate hikes this year

Markets

Yesterday, trends of the previous days continued with a further steepening of the US yield curve acting as a key driver translating into a weaker dollar and a better bid for US equities. The finalization of the Trump’s Big Beautifull budget Bill in the US Senate and the trade negotiations heading for the July 09 deadline continue playing on the background as well. US data were mixed with a further downward revision of Q1 GDP (‐0.5% QoQa), solid durable goods orders/shipments and mixed jobless claims (lower than expected initial claims, but higher continuing claims). It was sufficient for markets to raise the odds that the Fed could be in the position to start cutting the policy rate more significantly after summer. Fed speakers (SF Fed Daly, Boston Fed Collins) still speak in a very conditional way but also didn’t aggressively reject market thinking. US yields yesterday again declined between 6.1 bps (2‐y) and 3.1 bps (30‐y). Moves on the German yield curve were much more limited (less than two bps across the curve). US major US equity indices add close to 1%, with the Nasdaq and the S&P 500 inches away from all‐time record levels. The US Treasury announcing to remove the ‘revenge tax’ from the budget bill after a deal with G7 allies on foreign taxation of US companies, is probably supportive for US assets. A risk‐on context combined with a bull steepening of the US yield curve only reinforced the by‐default USD‐downtrend. At 97.15, the DXY index closed at the lowest level since March 2022. EUR/USD finished near the 1.17 big figure. For now, the USD/JPY‐decline is less outspoken with the pair holding in a relatively tight sideways range (close 144.4).

Overnight, US Commerce Secretary Lutnick said the US and China ‘finalized’ the trade framework reached in Geneva. He also indicated that the US is moving to reach agreements with 10 major trading partners going into the July 09 deadline. US president Trump in this respect indicated that a deal with India might be close. Countries might be put in different ‘categories’ according to the status of deals reached (or not yet being reached). At least for now this looks like a relatively orderly framework, potentially comforting markets. Later today, the eco calendar is well‐filled including EC confidence indicators and first national EMU CPI data (Spain, Belgium). Even so, the focus will stay on the US data with US May PCE deflators and (final) consumer confidence of the University of Michigan. Soft PCE deflators (0.1% M/M) in particular might be seen as validating expectations on the Fed moving towards a neutral rate faster than what had been guided of late. If so, short‐term US yields still have downside, with next support for the 2‐y yield (currently 3.74% near 3.55%/3.50%). In such a scenario, more (cyclical) USD‐losses might be on the cards.

News and views

Tokyo June inflation numbers were more modest than feared. Prices in Japan’s capital rose by 3.1% Y/Y (from 3.4% in May and vs 3.3% expected). Price rises in the underlying gauge excluding fresh food slowed from 3.6% Y/Y to 3.1%. Details showed water utility prices falling 34.6% Y/Y, reflecting a four‐month waiver of water charges by the regional government to ease the cost‐of‐living burden. This Tokyo specific measure won’t meaningfully show in national Japanese numbers due on July 18. Without this effect, core CPI likely stabilized in June following significant upward surprises in April and May. With more clarity expected on a potential trade framework in the US in coming weeks, this persistent underlying price pressure might become the BoJ’s central focus again when it meets next on July 31st (including updated quarterly forecasts). Right now, Japanese money markets expect a status quo with only a 50% probability that the BoJ will this year resume its hiking cycle. We are inclined to err on the hawkish side of this positioning.

The Bank of Mexico lowered its policy rate as expected by 50 bps to 8% in a split decision (4‐1; dissenter in favor of no change). The central bank changed its forward guidance saying it will assess further adjustments depending on the data. At previous meetings, they hinted at more accommodative 50 bps rate cuts ahead. Recent upward inflation surprises, which prompted revisions higher to the expected CPI path, triggered the change of tone after 325 bps of cumulative policy rate reductions since March 2024.

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