Dollar rally proves short lived
The gains made by the dollar overnight on Wednesday proved short lived as an appeals court upheld President Trump’s tariffs (for now) and weak US data saw the greenback lose out yesterday. The dollar had gained to under $1.1250 overnight on Wednesday after a US trade court ruled most of President Trump’s tariffs were not legal. However, the dollar lost ground as a revision to US Q1 GDP data showed the economy contracted by 0.2% last quarter and an appeals court temporarily overruled the trade court and thus allowing tariffs to continue for now. The dollar slid with the euro gaining about a cent back to $1.1350 currently while sterling gained back to $1.3480 this morning. The euro edged up against sterling, and is back trading above 84p.
Bonds yields moved lower during the session yesterday. US 10-year yields were down 6bps to 4.42% while UK 10-years were down 8bps to 4.65% and German down 5bps to 2.5%. Shorter dated bonds saw similar falls in yields yesterday. In equity markets, there was limited gains from the court announcement that initially froze Trump tariffs as equities were buffeted by poor US data and ultimately by the appeals court reprieve for tariffs. The S&P rose by 0.4% for the day with the Nasdaq also up 0.4%. In European markets, the FTSE closed down slightly, losing 0.1%, as did the Eurostoxx.
US GDP fell, at an annualised rate, of 0.2% in Q1 revised up marginally from a fall of 0.3%. However, the underlying data was concerning as the revision was due to an upward revision to business investment (potentially from businesses bringing forward investment ahead of tariffs) and a buildup in inventories while consumer spending, the bedrock of the economy, was revised down to an annualised rate of just 1.2%, the weakest growth rate since early 2023. Net exports were sharply negative (reducing growth by near 5 percentage points on an annual basis), as front running of tariffs saw imports surge in the quarter, running at an annual rate of over 40%. Overall the data paints a picture of weak consumer spending and trade uncertainty impacting business activity. Other US data out yesterday was also on the poor side, initial jobless claims rose to 240k last week, the third highest this year, while uncertainty is hitting the property market with pending home sales down 3.5% year-on-year in April.
Fed Chair Powell and President Trump met at the White House. President Trump and Powell have been at odds publicly with Trump arguing strongly for the Fed to cut rates and criticising Powell for delaying monetary policy easing. The White House said that the President pressed Powell to cut rates as Fed policy was putting the US ‘at an economic disadvantage to China and other countries’. The Fed said that Powell did not discuss his expectations for monetary policy with Trump and told him Fed decisions were based on ‘careful, objective and non-political analysis’. Trump had mused publicly on social media about replacing Powell before the Chairman’s term comes to an end in May 2026 – something Trump is legally not allowed to do – but the White House said that the men did not discuss Powell’s Fed role at yesterday’s meeting.
Governor Bailey of the BoE urged the UK Government to seek a broader trade agreement with the EU. He said ‘the evidence on Brexit suggest the changing trade relationship has weighted’ on the UK economy and he welcomes recent agreements with Brussels and called for a deeper and broader trade agreement to ‘minimise negative effects of Brexit’ which he referred to as a non-tariff barrier to trade.
In the UK, the Lloyds business barometer rose to a nine month high in May. The index rose to 50 from 39 in April. April’s survey was downbeat as it was conducted during the market turmoil that followed President Trump’s April 2nd tariff announcement. However, the market recovery following the pause in much of those tariffs and the UK-US trade deal in May boosted business confidence last month with firms increasingly confident not only about their own outlook but also the outlook for the economy as a whole. Business’s inflation expectation also fell this month with fewer firms planning to increase prices while the measure of expected hiring rose, good news amid signs of a softer labour market.
Looking to the day ahead, economic data due today includes German inflation data and US personal income and spending data as well as PCE inflation. Speakers due out include ECB’s Muller and Panetta.