Trump’s Trade Frustrations with Xi Signal a Deepening U.S.-China Stalemate

The Bank of Canada held interest rates steady for a second consecutive meeting, but officials said there may be a need to cut borrowing costs if the economy weakens and inflation remains contained as US tariffs make an impact.

Officials led by governor Tiff Macklem kept the policy rate at 2.75% on Wednesday, matching expectations of markets and the majority of economists in a Bloomberg survey.

Policymakers said they held borrowing costs steady as they gain more information on US President Donald Trump’s trade conflict, which they called “the biggest headwind facing the Canadian economy” as it slams exports and adds to uncertainties for consumers and businesses.

At the same time, officials said the economy held up stronger than expected in the first quarter, and flagged a recent surge in core inflation measures.

“With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, governing council decided to hold the policy rate as we gain more information on US trade policy and its impacts,” policymakers said in a statement.

The loonie rose to a year-to-date high versus the US dollar, trading at C$1.3666 as Macklem spoke in Ottawa. Canadian debt held gains across the curve and tracked US rates, with Canada’s two-year yield down about three basis points to 2.59%.

While policymakers said there was “clear consensus” to pause and wait for more information on how the trade dispute plays out, the bank introduced some limited guidance on where borrowing costs are likely headed.

“On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained,” Macklem said in his opening remarks, adding that policymakers had a “diversity” of views on the future rate path.

Bank of Canada governor Tiff Macklem (right) and senior deputy governor Carolyn Rogers at the news conference.

Combined, the communications show the central bank is comfortable waiting for clearer signals on how the trade dispute will evolve. At the same time, policymakers are actively discussing resuming monetary easing should the economy deteriorate and inflation remain under control.

A weakening economy for the rest of the year is the base case in a Bloomberg survey of economists, with gross domestic product forecast to contract in the middle two quarters of this year. Inflation is seen averaging around the bank’s 2% target throughout 2025.

“July looks more promising for a quarter-point ease if, as we expect, the jobless rate continues to move higher, and inflation in items not subject to tariff pressures eases off a bit,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.

A lot of water will pass under the bridge between now and the July 30 decision, Karl Schamotta, chief market strategist at Corpay, told investors. Two retail sales reports, two jobs numbers, two inflation updates, a quarterly consumer and business survey and a number of tariff deadlines are set to land before then, he pointed out.

“If the economy remains surprisingly resilient and price pressures continue to build, rate cuts could be pushed further into the future.”

When the bank paused in April for the first time this easing cycle, it abandoned point estimates for gross domestic product and inflation for the first time since the Covid-19 crisis. Instead, central bankers offered two potential scenarios for the economy. It mentioned neither of these scenarios in the communications on Wednesday.

Macklem told reporters at a news conference that the Canadian economy was somewhere in the middle of the two scenarios, but that the likelihood of the more severe outcome — which had projected a year-long recession in the country — seemed to have been reduced. Senior deputy governor Carolyn Rogers said the bank hopes to offer point forecasts in its July monetary policy report, but some resolution to the uncertainty is needed first.

Trump has applied tariffs on a variety of Canadian goods, including steel, aluminium, autos and products that don’t comply with the North American trade pact. Uncertainty remains elevated as the administration appeals a court ruling that overturned many of his tariffs. That ruling did not apply to his sectoral levies, and Trump signed an order on Tuesday doubling the metals tariffs to 50%.

In the statement, the bank said it would continue to monitor how tariffs reduce demand for Canadian exports and how it affects business investment, employment and household spending. Officials are also watching inflation expectations and how higher tariff costs are passed through.

“The governing council’s press release strikes a dovish tone, and governor Macklem’s opening statement indicates policymakers see risks skewed towards additional rate cuts this year. We also expect the Bank of Canada to resume rate cuts, likely as soon as the third quarter — once policymakers have weaker GDP growth and core inflation data in hand,” says Stuart Paul, US and Canada economist at Bloomberg Economics.

Macklem said it was “still too soon to see the direct effects of retaliatory tariffs in consumer price data,” referring to the levies Prime Minister Mark Carney has levied on imports of some US goods, and which are currently tallying well below the total C$20 billion (RM61.82 billion) the federal government is expecting.

Core inflation measures surged to 3.2% in April, the highest in more than a year. While Macklem repeated that the bank is seeing “some unusual volatility” in core gauges, he also said the measures “suggest underlying inflation could be firmer than we thought.” Higher food prices, brought on by trade disruption, may be partially responsible, the bank said.

It’s clear the Bank of Canada is more focused on inflation at the moment than the weakening economy, Charles St-Arnaud, chief economist at Alberta Central, said on BNN Bloomberg Television.

“I’m wondering how much of that is also influenced by their experience over the past two years. I’m sure they still have some PTSD from the sharp inflation increase in 2022,” St-Arnaud said.

At 2.75%, the benchmark overnight rate is at the midpoint of officials’ estimate for the neutral range, where policymakers believe borrowing costs are neither stimulative nor restrictive.

Source: Theedgemarkets

The ISM Services index fell 1.7 points to 49.9 in May, coming in well below expectations for a modest improvement to 52.0. This marked the first time that the index fell into contractionary territory since June 2024. Ten of eighteen industries reported growth in May, down from eleven in April and fourteen at the start of the year.

Business activity fell 3.7 points to 50.0, while new orders fell an even sharper 5.9 points to 46.4. The backlog of orders also declined a steep 4.6 points to 43.4. Meanwhile, new exports orders remained relatively unchanged, easing only modestly to 48.5.

The employment subindex managed to improve, moving back into expansion territory after rising 1.7 points to 50.7.

The supplier deliveries index trended higher, increasing by 1.2 points to 52.5. Meanwhile, the prices paid sub-component shot up 3.6 points to 68.7 – the highest level since the end of 2022. Several survey respondents made direct references to tariffs, with one stating “Tariffs remain a challenge, as it is not clear what duties apply. The best plan is still to delay decisions to purchase where possible”.

Key Implications

Today’s ISM report is disappointing, as it indicates that even the services sector is starting to feel the pinch from the uncertain trade environment. The details of this morning’s report were not particularly encouraging, with steep drops reported in business activity, new orders, and the backlog of orders. The only bright spot was the improvement in the employment subindex, which indicates that despite the challenging environment, services-based businesses are still hanging on to their workers and likely doing some moderate hiring.

The fact that the ISM services index joined its manufacturing counterpart in contractionary territory is a clear sign that the tariff turmoil is rubbing off on the services sector too, with comments from survey respondents that touched on the impact of tariffs also supporting this theme. Additionally, the ongoing increase in the prices paid subindex, indicates that the inflationary pressure from tariffs is sure to make its way on the services sector too.

Source: ACTIONFOREX

Key Points:

Job Creation Weakens: Is Labor Market Cooling Off?

U.S. private employers added just 37,000 jobs in May, marking the weakest monthly gain since March 2023, according to the latest ADP National Employment Report. This slowdown adds to growing evidence that the labor market may be losing steam after a strong start to the year. The deceleration in job growth could influence expectations for Federal Reserve policy, especially with inflation still sticky.

Sector Breakdown: Leisure and Finance Strong, Professional Services Lag

The service-providing sector contributed 36,000 new positions, with leisure and hospitality adding a robust 38,000 jobs. Financial activities also saw solid hiring, gaining 20,000 jobs. However, these gains were offset by notable losses in professional and business services (-17,000) and education and health services (-13,000). In the goods-producing sector, construction was a rare bright spot, adding 6,000 jobs, while manufacturing and mining saw declines.

Regional Divergence: West Rebounds, Northeast Contracts

Geographic trends showed uneven performance. The West added 37,000 jobs, driven by a sharp 35,000-job increase in the Mountain region. The Midwest posted a modest gain of 20,000, while the South lost 5,000 positions. The Northeast saw the most significant contraction, shedding 19,000 jobs, primarily from a 16,000-job loss in New England.

Wage Growth Steady: Pay for Job-Changers Remains Elevated

Despite weaker hiring, wage growth remained stable. Pay for job-stayers rose 4.5% year-over-year, while job-changers saw a stronger 7% increase. The financial activities sector led with a 5.2% median pay increase for job-stayers. Pay growth was notably weaker in small firms (2.6% for those with under 20 employees), while medium and large firms posted stronger wage gains, closer to 4.8%.

Firm Size Matters: Mid-Sized Businesses Drive Hiring

Mid-sized companies (50–249 employees) led employment gains with 51,000 new jobs, while small businesses cut 13,000 positions and large firms trimmed payrolls by 3,000. The strong showing by mid-sized firms suggests some resilience in the middle market, even as hiring pressure intensifies in other areas.

Market Outlook: Bearish Bias on Labor Strength

The sharp drop in job creation and regional softness point to a weakening labor market. While steady wage growth offers some support to consumer demand, the overall tone of the report is bearish from a labor strength perspective. Traders should monitor upcoming Fed commentary closely, as softening employment may alter rate expectations heading into the summer.

Source: FX Empire

Donald Trump is ramping up his attacks on Federal Reserve Chairman Jerome Powell. This time, it’s over a disappointing ADP jobs report and the Fed’s refusal to lower interest rates. Trump’s frustration spilled onto Truth Social where he called Powell “unbelievable!!!” and repeated his demand: “LOWER THE RATE.” His anger follows ADP’s announcement that private payrolls grew by just 37,000 in May—the weakest reading since March 2023. Trump argues the Fed is dragging its feet while other global powers move faster.

Weak Jobs Data Reignites Trump’s Fury

The ADP report shocked markets. Economists had forecasted a gain of over 110,000 jobs, but reality came up far short. This weak showing landed just before the official government report from the Bureau of Labor Statistics, making Wall Street even more nervous. Trump didn’t waste a second, pinning the blame on Powell and using it to renew his call for lower interest rates. He also noted that the European Central Bank has already lowered rates nine times. “We’re falling behind,” Trump warned, saying the U.S. is now at a global disadvantage.

Interest Rates Divide the Fed and Trump

Tensions between the Fed and the White House are heating up. Trump recently met Powell in person, reportedly telling him that holding interest rates steady is a mistake. Powell, in contrast, insists that decisions must be based on data, not politics. He’s taking a cautious stance, especially with inflation concerns tied to Trump’s new tariffs. The Fed has kept its benchmark rate at 4.25%-4.5% and is not expected to cut it at its upcoming June meeting. However, inside the Fed, a split is growing. Some members support eventual rate cuts, while others warn that inflation pressures—especially from tariffs—could linger.

Global Central Banks Cut While the Fed Waits

Outside the U.S., things look different. The European Central Bank has been aggressive with rate cuts—seven so far and an eighth expected soon. Their logic is that inflation is cooling and growth is sluggish. Even Switzerland may follow, with deflation showing up in recent data. Trump sees this global trend and can’t understand why the Fed isn’t acting. He argues that Powell’s hesitation puts American workers and businesses at a disadvantage. Trump’s message is clear: adapt or fall behind.

Interest Rates Policy Caught Between Politics and Data

The Fed’s approach to interest rates is rooted in long-term strategy. Powell says short-term political pressure can’t drive monetary policy. Still, Trump’s relentless push adds weight to the debate. If the economy keeps cooling and job data keeps missing forecasts, the Fed may have no choice but to act. But for now, Powell’s stance is to wait and watch. That patience, however, may only intensify Trump’s attacks.

Final Thoughts

The Fed’s next policy decision is set for June 17–18. As the date approaches, all eyes will be on the Labor Department’s full jobs report and inflation data. Trump will likely keep hammering Powell if the numbers don’t improve. With tariffs expected to drive prices higher, the Fed faces a tough call—cut rates to support jobs, or hold the line to contain inflation. Either way, the clash between Trump and Powell over interest rates isn’t going away anytime soon.

Source: CryptoSlate

Federal Reserve Bank of Minneapolis President Neel Kashkari said the US central bank is well positioned to wait and see how tariff policies impact the economy before adjusting interest rates.

“The economy is seeming like it’s pretty resilient so far, and so for me right now is the time to get data, see how the tariff negotiations shake out before we reach any firm conclusions about the direction of interest rates,” Kashkari said Wednesday in an interview on CNN.

Kashkari said a pullback in business investment amid tariff uncertainty is an overhang for the US economy.

“The longer it goes on, the bigger negative effect it has,” Kashkari said.

He added that some businesses are examining different ways to eventually lay off workers and noted that the labor market has already softened some.

A report out earlier Wednesday showed private-sector hiring decelerated to the slowest pace in two years.

Fed officials have left interest rates unchanged so far this year, and are expected to do so again when they meet June 17-18.

Source: Bloomberg Europe

The latest Beige Book has just landed, offering a snapshot of economic conditions across the Fed’s 12 districts. A slight decrease in overall economic activity.

Understanding the Federal Reserve’s Beige Book

Before diving into the specifics, let’s clarify what the Beige Book is. Published eight times a year, roughly two weeks before each Federal Open Market Committee (FOMC) meeting, the Beige Book provides anecdotal information on current economic conditions by district. It’s compiled from reports by Reserve Bank contacts, gathered through interviews with business contacts, economists, market experts, and other sources.

Think of it as a qualitative report offering on-the-ground insights that complement the quantitative data the Fed analyzes. It covers various sectors, including consumer spending, manufacturing, real estate, and labor markets. The Federal Reserve uses this information to help inform its monetary policy decisions, making it a closely watched report by economists and market participants alike.

Decoding the Findings: What Did the Report Reveal About Economic Activity?

The key takeaway from the recent report is the slight decline in overall economic activity. This isn’t a widespread collapse, but rather a subtle cooling reported across several regions. Here’s a breakdown of the general picture:

This reported dip in economic activity is a signal that previous economic momentum might be fading, which has direct implications for employment, consumer spending, and overall business health.

Inflation Watch: What Does the Beige Book Say About the Inflation Rate?

Another critical component of the Beige Book is its assessment of prices and wages, which provides insight into the current inflation rate. The latest report suggests that inflation is expected to continue at a moderate rate.

Why is this significant? It indicates that while inflation may have peaked from its highest levels, it hasn’t yet fallen back to the Fed’s target rate. The persistence of a moderate inflation rate means:

This persistent moderate inflation rate complicates the Fed’s job. They are balancing the goal of bringing inflation down with the risk of causing a significant recession by tightening monetary policy too aggressively. The Beige Book’s qualitative data on price pressures provides valuable context for this delicate balancing act.

Challenges and Opportunities

The slight decline in economic activity presents challenges, such as potential recession risks and continued market uncertainty. However, it also presents potential opportunities. If the economy slows significantly, it could eventually lead the Federal Reserve to ease monetary policy, which has historically been a tailwind for risk assets, including the crypto market.

The persistence of the inflation rate remains a challenge, forcing the Fed to maintain a cautious stance. Navigating this environment requires patience and a clear understanding of the forces at play.

Conclusion

The Federal Reserve’s latest Beige Book offers a valuable, albeit slightly concerning, look at the U.S. economy. The report of a slight decline in overall economic activity, coupled with expectations for a moderate inflation rate, paints a picture of an economy that is cooling but still facing price pressures. These factors are highly relevant to the crypto market, influencing everything from investor sentiment to expectations around future Fed policy.

While the Beige Book doesn’t offer specific crypto trading signals, it provides essential context for the macroeconomic environment in which digital assets operate. Staying informed about these reports and understanding their potential impact is a key part of navigating the complexities of the current market landscape.

Source: CryptoSlate