US TSYS: Sentiment Gradually Cooling as Markets Await US/Iran Deal Confirm

The Bank of Canada's quarterly Business Outlook Survey (BOS) for Q2 showed relative resilience in the private sector and anchored inflation expectations in a challenging period. The survey results should be considered even more stale than usual, given that the main BOS interviews were conducted in May which preceded a substantial drop in oil prices as the US and Iran reached a ceasefire memorandum of understanding (though the Business Leaders' Pulse (BLP) responses were a snapshot as of June 30, including the 5-year ahead inflation metric.). Against this backdrop, indicators of underlying strength are of particular interest since they may have been even more positive coming out the other side of the Middle East conflict. The main findings in the report:

• Business sentiment (taken from the BLP on June 30) weakened after 3 consecutive quarterly improvements. Q1 had seen the best since Q3 2022, with Q2 2026's 14% still above the nadir in Q2 2025. Expectations of future sales growth fell and current sales were negatively impacted by the war though still relatively resilient.
• Meanwhile, employment intentions are weaker than the historical average, with some slack in evidence as the overall intensity of labor shortages abated.
• Firms saw inflation at between 3.0-3.5% over the next two years; 44% of firms saw inflation of 3+%, vs 11% in the prior survey. Passthrough indications were mixed (40% are not passing on cost increases to customers with 25% partially passing them through and around one-third fully passing them on over the next 12 months). And about 1/5 of firms saw cost pressures from tariffs/trade, smaller than prior quarters.
• The report determines that "alongside this weakening in business sentiment...the activity indicator declined, largely reflecting a weaker sales outlook. Meanwhile, the BOS price indicator increased due to expectations for both higher inflation and stronger growth in input and selling prices. This divergence between the indicators is consistent with a negative supply shock associated with the war in the Middle East and with regional and sectoral differences."
• Given developments since then, the BOC will probably downplay the negative growth and upside inflation implications from this survey. Indeed re the latter, 5-year ahead inflation expectations (from the June 30 BLP) remained 2.7% which is unch on the quarter and below last year's averages, suggesting anchored expectations.
• Still, investment intentions remained robust which is a positive for future productivity, key to the BOC's expectation that real GDP growth can pick up. Here's the BOS's description of developments in investment intentions:
• "Domestic demand continues to support investment plans overall, but soft demand and lingering uncertainty are still weighing on investment plans for some firms. Productivity-related investment plans are still more prevalent than in recent years, including investments in equipment upgrades and AI integration. Routine maintenance remains the most common reason for investment spending. Elevated commodity prices are sustaining investment among firms tied to the natural resources sector, particularly oil and gas. Firms expecting increases in sales linked to public spending also have strong investment intentions."

• RES 4: 187.95 High Apr 17 and the bull trigger   
• RES 3: 187.56 High Apr 30
• RES 2: 186.56 76.4% retracement of the Apr 17 - May 6 bear leg  
• RES 1: 185.86/186.32 High Jun 30 / High Jun 16 and 17
• PRICE: 185.43 @ 20:30 BST Jul 7
• SUP 1: 183.78/183.17 Low Jul 2 / Low Jun 24
• SUP 2: 182.05 Low May 06 and a bear trigger
• SUP 3: 181.87 Low Mar 16
• SUP 4: 180.81 Low Feb 12 and a key M/T support  

EURJPY has recovered from last week’s low. A continuation higher would cancel a recent bearish threat and refocus attention on key short-term resistance at 185.86, the Jun 30 high, and 186.32, the Jun 16 and 17 high. Clearance of both price points would be a bullish development. On the downside, support to watch lies at 183.17, the Jun 24 low. A break of this level would pave the way for an extension towards 182.05, the May 6 low.

• Treasuries look to finish mixed Monday, curves steeper after Bonds pared early gains - trade weaker after the bell. Late session flattener Block: -5,323 TYU6 109-20, post time bid, DV01 $346,000, vs. +2,817 USU6 112-12, post time offer, DV01 $370,000.
• The pullback last week in Treasuries highlights a key short-term resistance at 110-10+, the Jun 26 high. Recent gains have resulted in a breach of the 50-day EMA, and a move through resistance at 110-00+, the May 29 high. The break continues to highlight a possible short-term reversal. Sights are on 110-14, a Fibonacci retracement. First key support to watch remains 109-06, the Jun 22 low.
• Projected rate hike pricing near steady vs. early morning levels (*): Jul'26 at +6.3bp (+6bp), Sep'26 at +16.9bp (+16.1bp), Oct'26 at +21.8bp (+20.4bp), Dec'26 +30.1bp (+29bp).
• The headline Services PMI came in exactly line with expectations at 54.0 (54.0 consensus, 54.5 prior), reflecting somewhat softer demand conditions vs prior as New Orders declined more than expected, to 55.1 (56.8 consensus, 57.3 prior) and Business Activity fell to 55.4 from 57.7 though both were very expansionary.
• The final June US services PMI from S&P Global was revised lower to limit the improvement seen from May to bounce only slightly above April readings. S&P Global US Services PMI: 51.2 (cons & flash 51.3) in June final after 50.7 in May and 51.0 in Apr; US Composite PMI: 51.9 (cons & flash 52.2) in June final after 51.5 in May and 51.7 in Apr.
• Gov Waller says on a panel Monday, when asked about whether the Fed needed to re-commit to its inflation target: "We've had inflation above target for five years, and so one of the issues is, yes, we'll get back to 2%.... we haven't got there, as you know, as fast as we wanted to, for lots of reasons, but maybe we will now....I've never been anything but committed to a 2% target....the issue is just how fast we get there."
• Look ahead to Tuesday: Japan’s 30 yr bond auction may garner attention overnight, before German IP and the BOE Financial stability review. US weekly ADP and trade data are then scheduled.