Geopolitics continued to dominate the headlines as markets also worked their way through a raft of central bank meetings. Equities lacked conviction while the US dollar was stronger across the major pairs. US Treasurys found a slight bid. Both the Fed and BoE meetings contained few surprises; at the BoJ policy was on hold and bond purchases are set to slow. In Sweden, the Riksbank cut rates 25bps to 2% as expected, while a return to deflation prompted the SNB to cut by 25bps to 0% on its key rate.
Solid US economic conditions and a lack of tariff-driven inflation meant the Fed was content to leave rates unchanged in the 4.25-4.5% range this week. The FOMC's updated summary of economic projections contained mixed signals from a policy perspective. The median estimate of individual FOMC members' forecasts still points to a further 50bps of rate cuts this year. But 7 members now see rates staying on hold, up from 4 in the March projections. That hawkish tint partly reflects an uplift in the inflation forecasts on the back of tariffs. Core PCE inflation is seen lifting to 3% this year (from 2.7%) before easing by to 2.4% in 2026 (from 2.2%). However, that comes alongside GDP growth that is expected to be slower at 1.4% in 2025 (from 1.7%) and 1.6% in 2026 (from 1.8%) and unemployment that is higher at 4.5% in 2025 and 2026, up from 4.4% and 4.3% respectively. At the post-meeting press conference, Chair Powell was balanced in his remarks noting that policy was in a good place, able to be adjusted as more clarity comes to light.
The Bank of England left rates on hold at 4.25% this week in a 6-3 vote. Rates have been cut at a quarterly frequency since August last year, with the BoE sticking to its guidance for a 'gradual and careful' easing cycle. There were no signs that a pivot to a faster pace of easing is being considered. That is despite a series of weak readings on employment and improving inflation data. Headline inflation eased from 3.5% to 3.4%yr in May, a touch above the 3.3% figure expected. However, the core rate met expectations slowing from 3.8% to 3.5%yr, and this was backed up by services inflation that came down from 5.4% to 4.7%, below the 4.8% consensus.
An unexpected 2.5k decline in Australian employment in May is not cause for the RBA to downgrade its assessment of the labour market, but a July rate cut is now priced above a 75% probability. After surging in April (87.6k), employment was unable to extend higher in May - defying expectations to rise by 21.5k (reviewed here). This was the latest in a series of volatile monthly employment outcomes. For the 3 months through May, employment gains averaged a solid 37k. That underlying momentum has held the unemployment rate low and steady at 4.1% since the start of the year. Meanwhile, the participation rate - although lower in May at 67.0% - is only just off record highs. The labour market has rebalanced from peak tightness, but conditions are still robust. That leans against the consensus view that has built a narrative around the RBA needing to deliver back-to-back cuts following weak GDP growth of 0.2% in Q1. Monthly inflation for May and job vacancies for Q2 are two key data points to watch next week ahead of the RBA meeting on July 7-8.
