USD: Goldman Sachs Maintains Bearish USD Outlook
The global bank weighs in on the USD backdrop, maintaining a bearish stance, with US firms and households expected to pay for tariff outcomes. It also looks at drivers of the dollar to different type of tariff announcements. See below for more details.
Goldman Sachs: "USD: Return to sender. A key underpinning to our bearish Dollar outlook is that US firms and households will pay for the majority of the tariffs, which will weigh on US relative performance. This, together with broader policy uncertainty, will lead investors to reduce their exposure to US Dollars. Recent research from our US economists confirms that US firms have shouldered much of the load so far, even if the proportions and timing have been a little different than in the first trade war, and we will get a fresh update on how these proportions are evolving with next week’s CPI release. The imposition on the US is likely to be even clearer for some of the sectoral tariffs being initiated now, as tariffs on harder-to-substitute goods are likely to weigh on US terms of trade, which is consistent with the initial copper market reaction. We attribute the muted (and, arguably, backwards) market reaction to the Letters to two factors. First, and most importantly, market participants—and our economists—mostly do not expect these tariffs to go into effect. After seeing the pattern several times already this year, markets have likely determined that the rates being floated are too high to sustain, and so have mostly abstained from the self-defeating cycle of tighter financial conditions and policy backtracking. Second, the initial market reactions were consistent with prior episodes where bilateral trade disputes boosted the Dollar against specific trading partners. This is consistent with our framework that the FX market reaction is different when the US is negotiating with one country at a time rather than the whole world at once. If broad tariff rate hikes are implemented once again, we think the Dollar reaction would be negative again. We expect that over time this will reinforce the perception that US policy direction has made it more difficult for firms to operate and foreigners to invest. This is consistent with FX performance so far this year, where flows have played an outsized role, and faster Fed cuts together with the Dollar’s positive correlation with risk could lead to an even broader shifting in FX hedging and portfolio allocations."
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US FISCAL: Available Extraordinary Measures Pick Up Ahead Of Tax Date
Treasury had $144B in "extraordinary measures" available to keep the government financed as of June 11 per a release Friday. That is up from $84B a week earlier and the highest since April 28.
- However, TGA cash continues to fall, to $309B latest (lowest since early April) Combined with a pullback in Treasury cash ($376B), keeping the total resources available to avert an "x-date" in the summer at around $450B .
- There will be another uptick in Treasury cash in the coming days, and it's likely Treasury allowed some of the extraordinary measures to be rebuilt (ie not exercised) in anticipation of more cash coming in.
- This is likely to be the last major uplift before the summer at which point x-date speculation will pick up if Congress hasn't passed a debt limit increase by then.
FED: Two Cuts Priced This Year Headed Into FOMC Week
As we head into the June Fed meeting week, market pricing is reflective of the FOMC’s messaging (that we describe in our preview):
- The next cut is only fully priced by the October FOMC meeting, with September seeing a roughly 80% implied probability of bringing the next 25bp reduction.
- Exactly 50bp of cuts are priced through end-2025, implying two Q4 cuts.
- That’s a shift from just after the May meeting, after which the next cut was fully priced by September, and there were closer to three cuts priced for the rest of the year.
- Overall cuts are seen backloaded this year (after 15bp in September, 29bp of cuts priced in Q4 - Oct/Dec combined), but falls off in Q1 (just 21bp cuts priced, 9bp of cuts priced for January and 12bp for March)
FED: Summary Of Economic Projections: Higher 2025 Inflation, Weaker Growth
The MNI Markets Team’s expectations for the updated Economic Projections are below.
- As of the May meeting, the Federal Reserve staff – whose outlook tends to be broadly shared by the median Committee member – revised their forecasts for growth weaker in 2025 and 2026, “as announced trade policies implied a larger drag on real activity relative to the policies that the staff had assumed in their previous forecast. Trade policies were also expected to lead to slower productivity growth and therefore to reduce potential GDP growth over the next few years. With the drag on demand expected to start earlier and to be larger than the supply response, the output gap was projected to widen significantly over the forecast period. The labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff's estimate of its natural rate by the end of this year and remaining above the natural rate through 2027."
- On inflation, "The staff's inflation projection was higher than the one prepared for the March meeting. Tariffs were expected to boost inflation markedly this year and to provide a smaller boost in 2026; after that, inflation was projected to decline to 2 percent by 2027."
- Our expectations for these changes fall somewhere in between those projections and the March SEP – a slightly higher unemployment rate, substantially higher inflation in 2025 but to a lesser extent in 2026, and weaker GDP growth this year. Longer-run variables should be unchanged.
MNI Markets Team Expectations For June 2025 Summary Of Economic Projections Medians
