Fed’s Waller Favors a Cut Next Month, and Investors Are Piling Into the Short End: June 20, 2025

Markets are mixed as participants weigh a trio of important developments ranging from geopolitics, monetary policy and cross-border commerce. President Trump’s decision to take two weeks to determine the action path on Tehran is weighing on crude oil prices, as energy traders position for an avoidance of a larger scale war. Turning to the Federal Reserve, comments from Governor Christopher Waller signaling the potential for a benchmark reduction next month are quelling slowdown worries and sending fixed-income players to the short end of the curve. Waller didn’t appear concerned about a significant climb in price pressures due to tariffs, remarking that inflation could see a short-lived one-time lift. And just this morning, trade conflict fears are resurfacing, as Washington prepares to possibly tighten or rescind allowances for semiconductor producers to manufacture in China. Stocks ran at the open on the back of Waller’s remarks, but then folks realized that his influence may not resonate with a sizeable chunk of the rate setting committee and began to consider a cut later rather than sooner. Investors are now reducing exposures to equities amidst split sector breadth, while bitcoin, commodity futures across the complex and volatility protection instruments also face selling pressure. Conversely, Treasuries are catching bids, with a preference towards closer maturities in bull-steepening fashion, while forecast contract volumes recover from limited trading during the Juneteenth holiday.

Top Candidate For The Job?

President Trump has wanted the US central bank to reduce rates imminently and stated that he will choose the successor to Jerome Powell long before the chairman’s term ends next May. Anecdotal evidence suggests that Governor Waller is a top candidate for the job and his call for a cut next month is a move in the direction of what the White House wants. Frankly, I agree, because financial conditions are far too restrictive at this juncture, and labor market risks far outweigh the possibility for an uptick in price pressures. Finally, if the institution steps down the monetary policy stairs once and inflation climbs, it can sit back and wait, considering that cost forces are rising in the low 2s and a traditional 25-basis point decline in the benchmark level will still keep fed funds in the 4s. 

International Roundup

UK Keeps Rate Steady and Retail Sales Plunge

The Bank of England (BoE), which held its key rate at 4.25% yesterday, implied that it will continue lowering the benchmark in response to evidence of weakening labor conditions. In another matter, shoppers cut back on trips to cash registers in May.

Regarding the BoE, of the nine central bankers, six voted to maintain and three favored a reduction to 4%. Governor Andrew Bailey explained that the organization is on a gradual easing path, but forecasting changes is difficult because the world is “highly unpredictable.” Going forward, the intensifying Iran-Israel conflict could make achieving the price pressure goal more difficult by driving up oil costs while trade conflicts could impose higher stickers on many items. On Wednesday, the Office of National Statistics (ONS) reported that annualized inflation fell from 3.5% to 3.4% in May, significantly above the target of 2%.

Early Sunshine Dampens May Sales

After climbing 1.3% m/m and 5% y/y in April, May retail sales volumes sank 2.7% and 1.3%, respectively. The median economist forecast called for a slip to 0.5% m/m and climb of 1.7% y/y. The slide relative to April was the largest since December 2023, according to the ONS. Weakness existed in all sectors. Food stores experienced the biggest contraction at 5% m/m followed by a 2.5% slip at household goods shops. Sunny weather in April boosted activity at stores as consumers splurged on home improvement items and food for barbecuing, resulting in sales that would have occurred in May being pushed forward. Additionally, the elevated April momentum established a higher comparison for May. This month, however, consumer sentiment, while remaining pessimistic at -18, strengthened slightly from -20, according to the GfK Consumer Confidence gauge. The result narrowly exceeded the forecast of -19.

China Maintains Prime Rate

After cutting rates 10 bps in May, the People’s Bank of China yesterday left its one-year and five-year loan prime rates at 3% and 5%, respectively, a decision that was widely anticipated. While last month’s action was likely a response to escalating geopolitical tensions, the trade truce with the US is giving the country more leeway with its monetary policy. Additionally, Zhu Hexin, the head of the Administration of Foreign Exchange, believes the country’s ability to counter movements of its currency exchange rate has strengthened.

As Foreign Direct Investment Falls

Foreign direct investment in China dropped 13.2% year over year (y/y) in May after a 10.9% descent in the prior reporting time span. Concerns over the country’s weak economy and excess manufacturing capacity have caused the faltering numbers, but from a global perspective, foreign direct investment has shrunk considerably, according to United Nations research. It was down 11% in 2024 and early indicators imply that it’s likely to drop again in 2025.

Hong Kong Prices Decline

Hong Kong’s Consumer Price Index continued to fall on a m/m basis in May, dropping 0.3% m/m after contracting 0.1% in April. The gauge was elevated by 1.9% relative to the year-ago period, falling below the median estimate for an unchanged 2%.

Japan Bankers Weigh in On Inflation

Certain members of Japan’s nine-person rate setting committee believe the ongoing trade war will delay the central bank from reaching its 2% inflation goal by one year, according to minutes released today from the organization’s April 30-May 1 meeting. The text also reveals that policymakers emphasized the need to remain flexible and data dependent because of high levels of uncertainty, including supply chain challenges. In a concern similar to those expressed by BoE members, bankers emphasized that high levels of uncertainty regarding geopolitical issues make forecasting difficult. Other members commented that if the central bank’s outlook for prices and economic activity manifests, continued normalization of monetary policy will be warranted.

As Finance Ministry Floats Changes to Bond Issuance

Japan’s Finance Ministry is suggesting that the country reduce issuance of bonds with durations of at least 20 years by $22 billion through March of next year and instead crank out more six-month debt in an effort to stabilize fixed-income markets. The proposal follows a poorly received auction of 20-year debt instruments last month and a BoJ announcement earlier this week that the central bank will slow the pace of trimming its bond holdings. 

While Prices Climb from April

The Pacific country’s National CPI climbed 0.3% in May m/m compared to 0.1% in the fourth month of this year but was up only 3.5% y/y, which matched the economist prediction. The gain relative to the year-ago period eased slightly from 3.6% in the preceding period. The core metric, which excludes items with more volatile prices, climbed 3.7% y/y, exceeding the 3.6% forecast and accelerating from 3.5%.

Input Prices Fall in Canada

Producers paid less for input items last month relative to April with the Industrial Producer Price Index descending 0.5% m/m. Economists anticipated a goose egg after the stat was down 0.8% in April. The y/y metric, conversely, was up 1.2%. The Raw Materials Price Index (RMPI) also depicted items at a discount, with the print 0.4% lower m/m after a -3.3% score in the fourth month of 2025, but down less than the predicted 0.8% fall. Raw materials were also 2.8% less expensive than one year ago. April’s print showed a 3.9% drop.