The dollar is back on the defensive as June begins, retreating amid a worsening in trade tensions between the United States and its global counterparts. On Friday, President Donald Trump announced he would double steel tariffs to 50 percent, again raising taxes on American consumers while prompting fears of a new round of countermeasures from Canada and the European Union. China yesterday accused the US of “seriously violating” the trade ceasefire agreed in Geneva last month, noting that Washington has imposed a series of “discriminatory restrictive measures,” including restrictions on chip design software, warnings against the purchase of Huawei products, and cancellations of visas for Chinese students studying at American universities. The Treasury curve is steepening once more, and North American equity indices are setting up for a negative open as investors brace for continued turbulence.
But volatility expectations have fallen across asset classes, reflecting a broader reappraisal of US economic policy risks. Markets have come to assume that every new tariff announcement will inevitably be followed by a climbdown, with many investors following Robert Armstrong’s TACO (‘Trump Always Chickens Out’) dictum. Threats to fire Jerome Powell have faded into the ether. Elon Musk has departed Washington, along with fears of a radical reshaping of government spending. And the ‘One Big Beautiful Bill’’s progress through Congress is alleviating any likelihood of a meaningful fiscal tightening.
This week’s economic data might help reinforce the sense of calm.
A decisive downturn in US economic data is unlikely to materialise just yet. Tomorrow’s Job Openings and Labor Turnover Survey is expected to reveal a modest decline in vacancies for April, but not the surge in layoffs that would foreshadow a meaningful rise in unemployment. Updates from the Institute for Supply Management on manufacturing and services activity – along with Chair Powell’s preferred Beige Book survey – are likely to underscore continued resilience, as firms adopt a wait-and-see approach amid lingering uncertainty. Friday’s non-farm payrolls report is forecast to show a gain of 125,000 jobs in May, down from 177,000 in April but still consistent with a cooling, not collapsing, labour market, with the unemployment rate expected to remain steady at 4.2 percent.
Across the border, expectations are muted ahead of Wednesday’s Bank of Canada decision. While the Canadian economy has outpaced our earlier, overly cautious projections – thanks in large part to a surge in net exports and inventory accumulation spurred by tariff front-running – underlying domestic demand has remained subdued. Consumer spending has held up better than anticipated, and an April uptick in the Bank’s preferred core inflation metrics has prompted markets to scale back expectations for imminent easing. Business investment remains lacklustre amid persistent policy uncertainty, and leading indicators point to a loss of momentum. A rate cut later this year remains in the cards, but for now, a summer pause appears most likely.
On the other side of the Atlantic, tomorrow’s euro area inflation data should help bolster the already-overwhelming case for a rate cut at Thursday’s European Central Bank meeting. Core consumer price growth is seen resuming its long decline after a brief Easter-driven spike in April, and an ebbing in services-sector pressures should contribute to further easing in headline measures, giving policymakers room to drop benchmark rates by a quarter point, while maintaining a dovish tone in their communications.
But “bullwhip effects” are still playing out across the global economy, and policy-related disruption is likely to hit economic data throughout the summer months. Data released last week showed imports into the US plunging by almost 20 percent in April, almost fully unwinding the previous month’s gains as businesses and consumers attempted to sidestep the impact of tariffs. We know that businesses turned far more cautious in April and May as policy headlines turned more volatile. And measures of consumer confidence — which often hit high-frequency activity indicators at a 90-day lag — deteriorated sharply over the same time frame. We hate to over-use the cliche, but the world really may have found itself in the artificially-calm eye of an economic storm. Hedgers should consider using this opportunity to reposition themselves before we hit the eye wall once again.
