Inflation Eases in Europe

MACRO FRAME

A heavy data calendar week in the US comes amid a fragile peace backdrop in the Gulf. Data this week is likely to shape US rate hike timing expectations substantially.

STOCK INDEX FUTURES

Equity index futures were mixed overnight. The Dow broke the 52,000 level on Monday, helped by a solid gain in the recently added Alphabet (Google). Since the Dow crossed 51,000, its biggest point contribution has actually come from Caterpillar, reflecting the importance of data‑center build‑out and related heavy equipment demand alongside the tech story as well as investor preference for more defensive names. Some sentiment indicators look stretched, but others are closer to long‑run averages. Positioning in risk assets, though elevated, has moderated from extreme levels earlier in the quarter, suggesting the market has been de‑risking at the margin rather than continuing to lever up, in line with the recent drawdowns in over the last couple of weeks.

With the geopolitical backdrop in the gulf easing, focus will center around the heavy macro calendar ahead. JOLTS data for May will be out later in the morning and is expected to show the economy had just under 7.3 million job openings during the month. Washington and Tehran have agreed to halt strikes and expected to meet in Doha in the coming days to discuss implementation of the interim 14‑point peace memorandum, with a specific focus on managing traffic through the Strait of Hormuz and de‑escalating tensions. Mediators have established communication channels to defuse incidents, and both sides have formally agreed (at least on paper) to stand down and allow vessels to move freely under the MoU. Brent has steadied around the low‑$70s  on the back of the return to diplomacy and expectations of resumed flows through the Strait, helping ease inflation expectations.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure.

CURRENCIES

US DOLLAR: The USD index is 0.28% higher to 101.38. Expectations of rate hikes from the Fed and optimism over the US economy continue to support demand for dollars. Investors continue to monitor developments in the Gulf ahead of JOLTS data this morning and June’s labor report later this week. While some of the recent dollar strength can be attributed to expectations of Fed rate hikes, the performance of US assets, mainly the stock market, are very much in favor of the US, fueling demand for dollars. Currently, markets are fully priced for one rate hike this year, seeing around 34 bps of total tightening by year-end, roughly the same pricing from Friday. The dollar is has been driven more by rates and macro factors than geopolitical developments over the last couple of sessions, lower oil prices and direct US-Iran talks would otherwise see a flight away from dollar safety.

Watch point: Thursday’s inflation data reinforced expectations that Fed policy will move higher before year-end. This week’s data calendar is set to shape Fed rate expectations substantially.

EURO: The euro is 0.25% lower at $1.1396. Softer-than-expected inflation prints out of France, Italy, and Germany are adding to pressure against the euro. Inflation slowed to 2% in  France, 3.1% in Italy, and 2.4% in Germany, driven by easing energy prices. The European Central Bank’s annual forum will see President Lagarde speak today. Markets will analyze her comments for clues on the assessment of economic conditions and a potential policy outlook. Lagarde is likely to reiterate that policy remains well-positioned while also warning against the second-round effects of inflation. Since the US-Iran ceasefire and reopening of the Strait, inflation expectations have fallen, prompting markets to reduce bets on rate hikes by the ECB. Traders are fully priced for a hike in December, though remain favorable to a move upwards at the October meeting. The market is seeing a total of 28 bps of tightening by year-end.

Watch point: A peace deal, restoration of oil flows through the Strait, and easing services inflation are likely to push back tightening expectations, though policy expectations are still biased upwards.

BRITISH POUND: Sterling is 0.31% lower at $1.3220. The Sterling has broken a three-day run of gains against the dollar, more or less reflecting broad dollar strength. Q1 UK GDP was confirmed at 0.6% QoQ, unchanged from the earlier estimate and a non-event for markets. Focus is instead centered around Andy Burnham. His latest speech pitched a 10‑year mission for “good” growth, centered on devolution and cooperation, which markets view as politically “radical” but not immediately threatening for fiscal credibility. Initial concern around Burnham’s potential for higher borrowing/spending has faded somewhat; the reaction to his remarks has been muted but marginally positive for sterling. Devolution as a theme does not inherently alarm markets, though it could prove costly over time; for now, he has not said anything that materially worsens the fiscal story, and some sterling shorts have been squeezed out.

JAPANESE YEN: The yen has fallen to its weakest level in 40 years at 162.37 yen per dollar. Japanese Finance Minister Satsuki Katayama reiterated that authorities were ready to respond appropriately at any time, but refrained from stronger rhetoric. Japanese authorities have already spent roughly ¥11.7 trillion (about $72 billion) intervening in April–May, but those efforts only briefly slowed the trend; officials continue to say they are “ready to respond,” raising expectations of further intervention even if timing is uncertain. However, the failure to reverse the downward trend has likely offered officials some reluctance in determining when to intervene next.

Market sees a total of 19 bps of tightening by year-end, with a move expected to come in January of 2027. US-Japan interest rate differentials continue pressure the currency as Fed rate hike expectations remain elevated. Fed pricing toward tighter policy, persistent rate differentials against Japan, and the lack of effectiveness of prior interventions without a sound Bank of Japan backdrop all continue to pressure the currency. Despite Japan’s Ministry of Finance signaling willingness to intervene, market skepticism of that effectiveness, largely resulting in a intervention vs. hawkish Fed and strong US data trade.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6888. The data calendar is thin this week for the Aussie, leaving attention on the heavy raft of US data. Minutes of the Reserve Bank of Australia’s June policy meeting showed the board still saw upside risks for inflation and stood ready to raise rates again if needed, having already hiked three times this year. However, members at the RBA were increasingly concerned about the risk of a downturn in the housing market, highlighting the board’s focus on the balance of risks. The recent drop in oil has led investors to pare back bets of another rate hike to just 40%, and to flirt with the idea of cuts as early as mid-2027. Recent pressure against the Aussie has come from stronger Fed rate hike pricing, which has led to a compression in interest rate differentials. Still, progress in US-Iran talks are largely supportive of the risk-sensitive currency.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in the RBA’s policy minutes.

TREASURY FUTURES

Yields moved higher across the curve ahead of today’s JOLTS data. Yields seem poised to maintain a tighter range ahead of upcoming data. Thursday’s PCE data reinforced expectations of Fed tightening and did little to change overall market odds on policy timing. While oil prices have dropped in recent sessions, yields have remained higher in the face of the hawkish shift in Fed expectations. While this week’s labor data is likely to move yields, the market has appeared to be more focused on the inflation problem in the US and has seemingly priced out any bad news in the labor market. Recent data has been indicative of a strong labor market, meaning it will likely take a sharp drop in hiring in this week’s report to reverse expectations of tightening this year substantially.

Warsh characterized the inflation overshoot as supply-driven rather than demand-driven, leaving room for yields to eventually ease if oil prices continue to hold a substantial drop. Warsh will be speaking at an ECB forum on Wednesday, where his remarks are likely to be scrutinized for details over the policy outlook. However, markets should not expect any signaling from Warsh, given that his new mandate is to not signal policy.

Watch point: The Warsh-led Fed held on rates and signaled broad institutional change. Mainly, markets should expect fewer words from the Fed and less policy signaling, raising near-term rate volatility with incoming data.

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