Following a weaker-than-expected US consumer confidence report, the DXY Index depreciated 0.5% to 97.7, alongside a 50 bps drop in the US Treasury 2Y Yield to 3.80%. However, Fed Chairman Jerome Powell poured cold water on his colleagues’ (Vice Chair Michele Bowman and Governor Christopher Waller) call for a July rate cut at his semi-annual congressional testimony. While the DXY ended the session at 97.9, it was down overall by 0.6% for the whole session, keeping most of its losses from the Asian session. The S&P 500 Index maintained a steady uptrend after Powell said that solid economic activity allowed the Fed time to study the impact of tariffs on inflation.
In line with our expectations, Powell reiterated that the Fed’s stance was a pause, not a pivot. Despite tame long-term inflation expectations, Powell expected the tariffs to pass-through in the June and July inflation numbers. In doing so, he kept the door open for a September cut, on the condition that the one-off price increase did not present an “ongoing inflation problem.” Powell also wanted to know where the tariff rates would settle after the 90-day pauses end in July/August. Yesterday’s Fed speakers – Governor Michael Barr, Fed Presidents Raphael Bostic (Atlanta). and Neel Kashkari (Minneapolis) – also backed Powell’s call for caution on tariffs and patience on rate cuts. The Conference Board noted that tariffs remained on top of consumers’ minds and were frequently associated with concerns about their negative economic and price impacts.
Not surprisingly, interest rate futures reduced the odds of a July cut to 18.6% from 20.7% and increased those for a September cut to 79.2% from 73.1%.
However, Powell added that the Fed could cut sooner if the US jobs markets weakened more than expected. We noted that US nonfarm payrolls dropped below 100k in June-August 2024 when the Fed delivered its first and larger-than-expected 50 bps cut last September. Payrolls have been higher at 147k and 139k in April-May despite the rise in the 4-week initial jobless claims. Nonetheless, consensus expects next week’s US monthly jobs data to show payrolls declining again to 122k in June and the unemployment rate rising to 4.3% from 4.2%.
We expect the weak USD bias to hold with the expectations for a September Fed cut. Fears of an escalation of the Israel-Iran crisis have also subsided following the sharp retreat in global crude oil prices to two-week lows.
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June 25 in history
The Korean war started in 1950 when North Korean forces crossed the 38th parallel and initiated a three-year conflict.
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