MEXICO: JP Morgan Expects Final 50bp Rate Cut, Before Easing Pace Slows
- JP Morgan expects Banxico to deliver one final 50bp rate cut on Thursday, before slowing down the easing cycle to 25bp. They expect one dissenter, but are unsure if this member will vote to slow the pace to 25bp or call for a pause. JPM still sees the policy rate at 7% by December.
- The Board will have the challenge of communicating a conflicting message from the weakening economy and recent pick-up of inflation above the target band. However, JPM thinks the balance of risks is still consistent with back-to-back cuts given the tight monetary stance.
- The Board will likely drop the dovish narrative in the inflation paragraph, but should continue to identify the shocks as temporary and with limited knock-on effects on underlying inflation.
- JPM sees the Board keeping its option open going forward without pre-committing. But the need to communicate cautiousness in the context of a gradually narrowing spread vs the Fed and inflation hiccups will likely be interpreted as slightly hawkish. A neutral, cautious narrative should be enough to signal a slower pace in H2.
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EU: Germany's Merz-'Signs US Could Be Interested In EU Tariff Deal'
Reuters reporting comments from German Chancellor Friedrich Merz. On US tariffs, Merz says that "There are signs the US could be interested in a deal with the EU," adding that "When I visit, I will try to persuade [US President Donald] Trump that we should have no tariffs on either side." It is unclear what visit Merz is referring to, with no trip to the White House currently scheduled for the chancellor. Earlier in May, Merz confirmed that he had invited Trump to visit Germany, specifically the ancestral home of Trump's grandfather. Again, there is no confirmation of whether the White House has accepted the invite.
- Bloomberg reports that the EU is preparing a trade proposal for the US that looks to inject momentum into trade talks. Bloomberg: "The new paper includes proposals that take into account US interests, including international labor rights, environmental standards, economic security and gradually reducing tariffs to zero on both sides for non-sensitive agricultural products as well as industrial goods, [...] the paper also outlines mutual investments and strategic procurement in energy, artificial intelligence and digital connectivity,"
- While the EU holds the competency to negotiate trade deals without input from the member states, it is likely that the Commission would seek approval from EU members before going ahead with the proposal.
EUR: FX Exchange traded Option
EURUSD (6th June) 1.1200p, sold at 0.0027 in ~1.45k.
STIR: Natixis Recommend Receiving Sep '25 ECB-Dated OIS
Natixis recommend receiving Sep ’25 ECB-dated OIS, targeting a move to 167bp, with a stop set at 183bp (177bp last).
- They note that “in addition to the de-escalation of trade tensions, the market has recently adopted the 'steady hand policy' of Schnabel, which involves integrating a potential ECB terminal rate at 2.00%”.
- Natixis see a higher probability of the ECB going below 2.00% by September (rather than halting at 2.00%) for several reasons, namely broader macro weakness, inflation expectations, higher risk of a hard landing for the U.S. than the market prices at present and expectations for a continued weakening of wage growth.
