Market expectations for a July cut inched up to 21.2% from 18.6%

International News via Reuters:

Global shares edged lower and the dollar was lower for a ninth straight session on Tuesday, as investors digested a flurry of U.S. economic data and comments from Federal Reserve Chair Jerome Powell to gauge the timing of any interest rate cuts.

Powell, speaking at a central banking conference in Sintra, Portugal, said he could not say if July was too early for a rate cut, but it “is going to depend on the data, and we are going meeting by meeting”.

Market expectations for a July cut inched up to 21.2% from 18.6% in the prior session, according to CME’s FedWatch Tool.

On Wall Street, the Dow advanced but the S&P 500 and Nasdaq retreated from record levels weighed down by a drop of more than 5% in Tesla after U.S. President Donald Trump threatened to cut off the billions of dollars in subsidies that Elon Musk’s companies receive from the federal government.

The Dow Jones Industrial Average rose 227.77 points, or 0.52%, to 44,322.06, the S&P 500 fell 19.78 points, or 0.32%, to 6,185.17 and the Nasdaq Composite fell 181.49 points, or 0.89%, to 20,190.00.

MSCI’s gauge of stocks across the globe fell 1.69 points, or 0.18%, to 916.20 while the pan-European STOXX 600 index fell 0.3% as concerns over the impact of tariffs on global growth were rekindled as a July 9 deadline by Trump draws closer.

On the economic front, U.S. data showed manufacturing remained in contraction territory in June, according to the Institute for Supply Management (ISM).

In the first reading of the week on the labor market, the Job Openings and Labor Turnover Survey, or JOLTS report, showed openings were up 374,000 to 7.769 million by the last day of May, but a decline in hiring indicated the market may have slowed.

“Despite a large jump in job openings in May, the economy continues to be stuck in Powell’s ‘no hire, no fire’ equilibrium,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

“It’s not a stable equilibrium and considering the ISM Manufacturing data, things may tilt towards a weaker job market over the summer.”

Investors will closely watch Thursday’s key government payrolls report, expected a day earlier than usual due to the Independence Day holiday on July 4, to help shape expectations for rate cuts from the Fed.

U.S. Treasury yields reversed course and turned higher after the data, with the yield on benchmark U.S. 10-year notes up 2.9 basis points to 4.255%.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 4.3 basis points to 3.764%.

Markets were also awaiting a resolution to Trump’s tax-cut and spending legislation, which U.S. Senate Republicans were struggling to pass.

The dollar index, which measures the greenback against a basket of currencies and is coming off its biggest first half drop since 1973, rose 0.09% to 96.85, with the euro down 0.08% at $1.1776. Sterling weakened 0.17% to $1.3709.

Against the Japanese yen, the dollar weakened 0.34% to 143.52. Earlier readings from the Bank of Japan’s tankan index of business sentiment indicated the biggest economies in the region were probably weathering the tariff storm for now, while a separate private sector survey showed the country’s manufacturing sector expanded in June for the first time in 13 months.

U.S. crude rose 0.48% to $65.42 a barrel and Brent rose to $66.92 per barrel, up 0.27% on the day.

Reporting by Chuck Mikolajczak; editing by David Evans

Analysts said the underlying softness in surveys highlights the challenges facing businesses and policymakers

International News via Reuters:

Worries over future U.S. tariffs are clouding the outlook for factories across much of Asia and Europe, according to surveys released on Tuesday which nonetheless showed some were able to shrug off the uncertainty and keep growing.

Among the bright spots, Japan’s manufacturing read-out showed growth for the first time in 13 months, South Korea’s activity contracted at a milder pace and China’s Caixin PMI index also expanded in June – confounding an official survey that showed activity shrinking for a third straight month.

In Europe, Ireland, Spain and the Netherlands were among the star performers even as the wider euro zone read-out was broadly flat and Britain continued to contract, albeit more slowly.

Analysts said the underlying softness in surveys highlights the challenges facing businesses and policymakers as they try to navigate U.S. President Donald Trump’s moves to shake up the global trade order with sweeping tariffs.

“We must recognise that the external environment remains severe and complex, with increasing uncertainties,” said Wang Zhe, economist at Caixin Insight Group. The Caixin/S&P Global survey showed Chinese manufacturing PMI rose to 50.4, surpassing expectations in a Reuters poll.

Japan’s final au Jibun Bank PMI rose to 50.1 due to an upswing in output, but overall demand remained weak as new orders shrank on concern over U.S. tariffs.

Factory activity in South Korea contracted for the fifth straight month though the pace of decline eased on relief over a snap presidential election on June 3 that ended six months of uncertainty.

In manufacturing, India was a significant outlier in the region last month, as activity accelerated to a 14-month high, driven by a substantial rise in international sales that helped spark a record-breaking spurt in hiring.

DEADLINE

Negotiators from major U.S. trading partners are rushing to reach deals with Trump’s administration by a July 9 deadline to avoid import tariffs jumping to higher levels.

While China is continuing its negotiations for a broader trade deal with the U.S., Japan and South Korea have so far failed to win concessions on the tariffs imposed on their mainstay export items like automobiles. The 27-member European Union is embarking on new talks in Washington later this week.

The euro zone HCOB manufacturing Purchasing Managers’ Index, compiled by S&P Global, edged up to 49.5 in June from 49.4 in May, its highest level since August 2022 – but still remaining below the 50 mark denoting growth in activity.

Moreover, national surveys revealed stark differences across the currency bloc. Ireland recorded the highest PMI at a 37-month peak of 53.7, while Greece, Spain, and the Netherlands also posted readings above 50.

“We seem to be in a sweet spot at the moment where it’s domestic activity that’s driving the index,” John Fahey, senior economist at AIB, said of the Irish read-out.

“There may be some level of activity and investment that was postponed for two or three years, and you’re just at the point now where that has to happen, even though there’s a more uncertain global backdrop.”

While Germany’s manufacturing PMI reached its highest in nearly three years, it still indicated contraction. France, Italy and Austria on the other hand registered faster declines in manufacturing conditions.

In Britain, outside the European Union, the manufacturing sector showed some signs of turning a corner in its long slump.

“That said, any hoped for stabilisation remains fragile and subject to potential headwinds that could severely impact demand, supply chain reliability and future growth prospects,” said Rob Dobson, director at S&P Global Market Intelligence.

Speaking at the start of a central bankers’ annual get-together in Sintra, Portugal, European Central Bank President Christine Lagarde said the global environment had changed fundamentally since the inflation spurt of the pandemic years.

“The world ahead is more uncertain – and that uncertainty is likely to make inflation more volatile,” Lagarde said.

Data on Tuesday showed euro zone inflation last month stood at the ECB’s 2% target, confirming that the era of runaway prices is over.

Additional reporting by Padraic Halpin in Dublin; Writing by Jonathan Cable and Mark John; Editing by Shri Navaratnam and Hugh Lawson

The ECB has cut rates eight times in the space of a year as inflation eased to its 2% target

International News via Reuters:

Two European Central Bank policymakers warned on Tuesday about the hit from a further appreciation of the euro on a weak euro zone economy that is bracing for painful U.S. tariffs.

The euro has risen some 9% against the dollar since April as investors, spooked by U.S. President Donald Trump’s unpredictable economic policy, warmed up to the European Union’s newfound military and industrial ambitions.

But a strong currency is a mixed blessing for the central bank because it makes exports more expensive and imports cheaper, pushing down both growth and inflation.

“If there is a 10% tariff plus a 10%-plus appreciation of the exchange rate, this is large enough to affect export dynamics,” Latvian central bank governor Martins Kazaks told Reuters at the ECB’s annual Forum on Central Banking in Sintra, Portugal.

EU officials have resigned themselves to a 10% tariff on goods exported to the United States as their baseline as they continue difficult negotiations with Trump’s administration ahead of a July 9 deadline.

The euro was trading at $1.18 on Tuesday, up 14% since the start of the year but still roughly in the middle of the range in which it has been for the past decade or so.

ECB vice-president Luis de Guindos said the central bank could ignore the euro’s rise against the dollar up to $1.20 but not higher.

“Beyond that, it will be much more complicated,” de Guindos told Bloomberg TV.

Euro zone manufacturing is only starting to recover from its 2022-24 – partly energy-related – slump, with new orders arresting a three-year slide last month.

Both Kazaks and de Guindos said the economy was weak but seemed to play down the prospect of more support from the ECB via interest rate cuts.

“The majority of the rate adjustment has been done,” Kazaks said. “If there are further cuts, they will be small and have signalling value, provided that we remain in the baseline.”

De Guindos said an additional cut was “not going to help the economy”, which instead needed certainty on trade and other policies.

The ECB has cut rates eight times in the space of a year as inflation eased to its 2% target, where it expects it to stay for the foreseeable future except for a short-lived dip in 2026.

It has signalled it will pause its rate-cutting streak in July and Lithuanian governor Gediminas Simkus said the central bank may keep rates on hold for longer.

“I don’t know if we’ll have all the information we need by September, but I remain open to every possibility,” Simkus said in an interview in Sintra on Monday.

“I believe a move, if any, is more likely towards the end of the year.”

Euro zone inflation came in at 2% in June, a flash reading showed on Tuesday, and consumers – who were stung by a cost of living crisis in 2022-23 – are also paring back their expectations for future price growth, according to an ECB survey.

Reporting by Francesco Canepa, Editing by Louise Heavens and Ros Russell