Good morning. Equities look set to extend May’s advance at this morning’s open, even as the dollar and Treasury yields climb amid another round of escalatory strikes in the Middle East. Overnight, America hit radar and missile sites in Iran, and Tehran responded with attacks on Kuwait. President Trump said he was “in no hurry” to agree to a deal that might reopen the Strait of Hormuz, warning “if we don’t get what we want, we are going to end it in a different way”. Both global oil benchmarks are up roughly 3% as inventories fall to dangerously-low levels, raising the risk of a non-linear spike in prices in the coming weeks.
The Canadian dollar is trading sideways, little changed from levels that prevailed ahead of Friday’s first-quarter gross domestic product print. Statistics Canada said economic output declined at an annualised 0.1% rate in the first quarter after a downwardly-revised contraction of 1.0% in the last three months of last year. This missed consensus forecasts for an expansion closer to the 1.5% mark, but did little to shift monetary policy expectations, with the Bank of Canada now seen delivering 25 basis points in tightening by year end, down only slightly from 31 points ahead of the release. We struggle to see this: once “bullwhip effects”* are removed in inventories and export volumes, it seems obvious that the economy is operating with extensive slack as consumers retrench and businesses refuse to invest—something that implies demand-led inflation risks remain very limited. Without a more fundamental change in direction, we expect the central bank to stay on hold through the remainder of the year.
The euro is holding firm ahead of tomorrow’s bloc-wide inflation print, which is expected to clinch a rate hike at the European Central Bank’s June meeting. After a series of country-level releases in recent sessions, the composite number is expected to show headline inflation accelerating to 3.3% in the year to May, with the core measure rising to 2.4%. A central bank survey published this morning showed consumer inflation expectations holding steady in April. Traders are putting 95% odds on a move in June and expect another to follow by year-end—but the euro has struggled to make headway against the dollar, reflecting a belief that the tightening needed to tame inflation will come at a meaningful cost to growth.
Across the Channel, the pound is little changed ahead of the release of more than a thousand pages of documents relating to Keir Starmer’s appointment of Peter Mandelson, a confidant of Jeffrey Epstein, as British ambassador to the United States. The emails and instant messages are widely seen as increasing the likelihood of a successful leadership challenge from Andy Burnham on the party’s left, and options markets are pricing in larger downside risks for sterling. At the same time, helped by comments from Governor Andrew Bailey, a sharp reduction in Bank of England tightening expectations—from three hikes this year to one—is tilting rate differentials against the pound while boosting growth expectations, counterintuitively helping put a floor under the currency.
The American economy will be back in focus this week. The Institute for Supply Management’s manufacturing and services surveys, together with the Federal Reserve’s Beige Book, will offer a read on how demand and supply conditions are evolving. On the labour-market side, the latest Job Openings and Labor Turnover update, the ADP employment survey, and weekly jobless claims will set the stage for Friday’s non-farm payrolls report, which is expected to show 86,000 jobs gained last month—down from 115,000 in April—with unemployment holding at 4.3%. Evidence of continued resilience could reinforce bets on the Fed delivering at least one more rate hike by year-end, while signs of softening might complicate that thesis considerably.
More broadly, most major currencies are caught in remarkably-tight ranges. Our turnover-weighted index shows one-month implied volatility in the major pairs plumbing lows not seen since July 2024—just before an unwind in the Japanese carry trade wrong-footed markets. Three forces are conspiring to suppress movement: strong equity returns driven by continued enthusiasm for the artificial-intelligence capital-expenditure cycle, which has made currencies more correlated with stocks than with rate differentials or oil prices; relative stability in cross-currency rate spreads after the initial Iran energy shock; and pervasive uncertainty that is keeping directional position-taking to a minimum. One conclusion that could be drawn is that volatility elsewhere is suppressing volatility in currencies. This amounts to an unstable equilibrium that is unlikely to last.
*The tendency for small fluctuations in demand and supply to amplify into progressively larger swings in orders and inventory as they ripple back up and down the supply chain, so that retailers, wholesalers, and manufacturers each over-correct in turn—much like a light flick of the wrist sends an ever-widening wave down the length of a whip*.
**In contrast with bullsh*t effects, which happen when politicians claim they can turn economies or geopolitical situations around with a simple change in narrative. Those statements often have decreasing effects over time.