The Global Week Ahead: Overplayed

Next Week's Risk Dashboard

• Keep Calm, Talk On—Trump’s latest tariff threat against Canada
• Looming US tariff deal deadlines are not finding any takers
• Nonfarm payrolls—estimates and significance
• ECB’s Sintra forum—key expectations
• U.S. Senate bill may be passed…
• …and the implications for Treasuries
• Eurozone CPI: less sticker shock given advanced easing
• US ISMs to further inform supply chain shocks
• Canada Day Tuesday
• US Independence Day Thursday
• Global macro

Chart of the Week

Two great nations celebrate their births and permanent independence this week including Canada Day on Tuesday and US Independence Day on Friday. That doesn’t mean that a holiday-interrupted week is predestined to be dull in the markets. Lighter than usual liquidity due to holidays will coincide with some key developments.

Among them are US nonfarm payrolls, the ECB’s annual central banking forum, a potential new tariff deadline for Canada this week, the fast approaching July 9^th tariff deadline set by the US against multiple countries, the possible passage of the Senate bill, and several other global releases.

NONFARM PAYROLLS—IT’S JUST ONE REPORT

Nonfarm payrolls and related labour market readings for the month of June are due out on Thursday this time because of the July 4^th holiday. I think they face upside risk. Just don’t stand by trading floor doors in the immediate aftermath of the payrolls number lest you get burned by the breeze of folks speeding to the exit for the early close.

A gain of 160k is forecast. That’s somewhat above consensus that is sparsely populated at the time of writing. If my only concern was maintaining top ranking as a US payrolls forecaster then I’d hug consensus, but that wouldn’t be fun.

One driver could easily be weather. Payrolls in May were artificially depressed by weather and so the rebound from that low base effect could be powerful in June. Chart 1 shows the San Francisco Federal Reserve’s measure for weather-adjusted payrolls; they were 106k higher than the officially reported gain of 139k. Chart 2 shows the household survey’s measure of the number of people were reported they were unable to be at work because of bad weather; it was over 100k for the highest number compared to like months of May over time.

Historically when there is a large weather-dampened month for payrolls, the next month’s payrolls rip higher. Chart 3 shows what happens to payrolls one month after times when the preceding month saw a weather-adjusted drag on reported job growth of 100k or more according to the San Fran Fed’s estimate. The biggest outliers from the depths of the pandemic were removed, but large weather drags tend to be followed by large gains. The history is limited to 2015 onward when the San Fran measure began.

Chart 4 is another approach in that it shows what happens to nonfarm the month after a month in which the household survey registers 50k or more workers unable to work due to bad weather.

Another consideration is that seasonal adjustment factors for months of June have tended to overstate payrolls in recent years. The four highest SA factors have all been to the four most recent months of June (chart 5). Something similar is expected this time. All else equal, any seasonally unadjusted change would tend to be overstated by a higher than usual SA factor.

We’ll get a fair amount of additional evidence on labour market conditions as other readings arrive before payrolls. They might inform the payrolls call, but probably only if they consistently point to a different outcome and offer big deviations. JOLTS job vacancies for May (Tuesday), Challenger job layoffs for June (Wednesday), ADP private payrolls in June (Wednesday) are on this list. The ISM-employment subindices will only be partially useful (Tuesday) given the low weight on manufacturing payrolls and because ISM-services-employment won’t be available until 90 minutes after nonfarm.

Also watch hours worked as a GDP gauge given GDP is hours times labour productivity. Hours are tracking a gain of 2.2% q/q SAAR so far in Q2 which is consistent with the Atlanta Fed’s ‘nowcast’ for Q2 GDP that presently stands at about 2.9% q/q SAAR. Growth of that magnitude is not screaming out for rate cuts.

Wage growth may ebb a touch after the rapid gain of 0.4% m/m SA the prior month. The unemployment rate is expected to be unchanged at 4.2%; it’s derived from the companion household survey that is extremely volatile and record declines of over 600k in jobs and the labour force the prior month.

Now, does this payroll report matter? Maybe. If it craters, then it would agitate the FOMC. President Trump would be all over Powell again, but in a perverse way since a weak payrolls report would likely be blamed on the uncertainty his administration’s policies are causing. I think the Federal Reserve will require more evidence than one month’s payrolls report and lots more evidence on the inflation readings.

Why? Because from day one they’ve made it very clear they will stick to the guiding principle of their Statement on Longer-Run Goals and Monetary Policy Strategy (here). Key is the part that basically says when a shock arises that could drive the simultaneous deterioration of both parts of the dual mandate through higher unemployment and higher inflation, the appropriate policy response becomes an empirical issue that assess over time which part of the dual mandate deteriorates the most. That, in turn, will take more than one single payrolls report to assess.

ECB’S SINTRA—THREE ISSUES TO WATCH

The European Central Bank’s annual Forum on Central Banking will occur from Monday through Wednesday. The agenda is here.

The key event is often thought to be the star-studded panel of global central bankers at 2:30pm local time, 9:30amET. On the panel will be Fed Chair Powell, ECB President Lagarde, BoE Governor Bailey, Bank of Japan Governor Ueda and Bank of Korea Governor Rhee plus a moderator from Bloomberg. Six people in one hour is 10 minutes each, maybe a little more for the stars and less for the moderator. We’ll see, but I always figure this panel at each year’s event is overly diluted and hence not terribly impactful.

What may be more important is Lagarde’s opening address on Monday (1:30pmET). The ECB is expected to announce the results of the review of its monetary policy strategy that began last year and could do so at this retreat. Will they tolerate small deviations in inflation a little more readily in future? Will the Governing Council signal greater willingness to act in more flexible and significant ways in response to sudden shocks than, say, the slow grind toward tighter monetary policy as inflation emerged following the pandemic? This review is unlikely to change much for medium-term monetary policy in practical ways versus emphasizing communication tools and standing by a permanent toolkit of policy tools.

And yet, watch for signals from Lagarde on whether the end to easing lies in sight. At a deposit rate of 2%, the ECB is likely very close to a neutral stance. At present, markets only have about one more quarter point rate cut priced and only fully so toward the December meeting or early 2026.

TRADE NEGOTIATIONS—KEEP CALM, TALK ON

US President Trump dropped a bombshell at the end of this past week as he declared trade negotiations with Canada to be over and that the administration would let Canada know what tariff rate will be applied against exports to the US within seven days. This followed Canada’s guidance that it intends to follow through on a Digital Services Tax (DST, background here) of 3% on domestic and foreign tech firms with domestic Canadian revenues of $20 million/year or more despite the US pledge to withdraw Section 899 from the US Senate bill. Whether Trump follows through, at what rate, with what possible exemptions and by what date are all highly uncertain. Here is his full post:

“We have just been informed that Canada, a very difficult Country to TRADE with, including the fact that they have charged our Farmers as much as 400% Tariffs, for years, on Dairy Products, has just announced that they are putting a Digital Services Tax on our American Technology Companies, which is a direct and blatant attack on our Country. They are obviously copying the European Union, which has done the same thing, and is currently under discussion with us, also. Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately. We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period. Thank you for your attention to this matter!”

First, I would counsel caution against some of the highly reactionary media headlines. Trump is a highly emotional President who often doesn’t deliver on his threats and frequently backs down. PM Carney responded by emphasizing the ‘complex’ trade negotiations are ongoing. It’s possible that the Digital Sales Tax is a ruse; for instance, maybe negotiations were stalling because Canada objected to a minimum US tariff against Canadian exports and the DST provided a convenient excuse.

Second, the US domestic lobby is likely to be leaning against any actions of the US administration against Canada. Canada is the number one export destination for US companies and Canada is a top three source of US imports (charts 6, 7). The US would be harming itself with punitive tariffs especially in highly integrated sectors like autos. I’d be surprised if the automakers are not lighting up phones at the White House.

Third, Canada views the DST as a sound tax. Its aim is to make tech firms—domestic and foreign, but given their size, particularly US tech firms—pay taxes while benefiting from recycled Canadian content, from monetizing Canadian data, and from local services just like any other firm. US tech aggressively supports and lobbies the White House against paying taxes and faces reputational risks in Canada.

It may well be that Canada eliminates the DST or provides exemptions. Estimates of annual revenues vary, but are generally in the low single-digit billions of dollars per year. Choose your hill to die on, one might quip. And yet the issue is deeper from a tax fairness standpoint as the US tech lobby uses its sway in the White House to influence Canadian tax policy.

Fourth, there are factual inaccuracies in Trump’s post that Canada will lean against. For instance, the Canadian duties on some US dairy exports only apply at quota levels far above the amounts that US producers deliver and the US has the same system (chart 8). Canada would be certain to remind the US of the hundreds of billions of subsidies that the US provides to corporate farms each year in the Farm Bill and the fact that the Americans and Europeans distort world agricultural trade more than anyone else.

Fifth, Canada has plenty of its own cards to play. As the country embarks upon a plan to develop natural resource projects, it could limit the role of US firms. As Canada raises defence spending, the hundreds of billions of dollars spent over time could be pledged to European firms. Canada has hundreds of billions of dollars to spend that tally $1.0–1.5 trillion over the next ten years, and the outcome of these negotiations may well determine whether US firms can participate. The US tourism business might have to continue reeling from the absence of Canadians. Cooperation on critical minerals that the US so desperately needs and on continental security may have to be sacrificed. Canada could enact measures against US industries that top the list of the US government’s subsidy largesse (chart 9). Just a handful of examples run from the Farm Bill to auto plant subsidies to heavy tech firm subsidies and defense subsidies. In short, Trump’s threatening claim that he has all the cards, has all the power and the implied threat to use it, is all rather one-sided.

Sixth, in my opinion, Trump is in near-panic mode. The July 9^th deadline he imposed for trade agreements is fast approaching. China, Canada, Japan and Europe are all balking at caving to US demands. Those countries understand the US political cycle better than the US administration. Against the ‘art of the deal’ reputation are the facts that Trump seriously overplayed his hand on tariffs and left himself no out. Chart 10 shows the line-up of tariff deadlines that lie ahead which signals significant risk of flaring tariff risks to markets.

Lastly, we don’t really have the ability to tell what the real issues may be. For instance, is the DST just an excuse for the US administration to play hard ball perhaps as Canada rejects the imposition of some base minimum tariff the US is seeking in order to pay for some of its tax cuts?

SENATE BILL PASSAGE—CUE DEBT ISSUANCE SURGE

The push is on in the US Senate to try and get its version of the ‘one big beautiful bill’ completed and on Trump’s desk to sign by week’s end. A preliminary vote is scheduled for Saturday June 28^th. Treasury Secretary Bessent has said there is a “very good chance” that the bill will be done and perhaps ready to sign as soon as by Friday July 4^th. Chart 11 shows current estimates of the impact of the Senate version of the bill on the deficit, tax revenues, and spending categories.

We’re at the fine-tuning stage for the most part. The main market sensitivity going forward will be the impact of a deal on the near-term Treasury market.

The US$36 trillion debt ceiling became binding in January. Lifting it is part of the bill. During the nearly six months in which Treasury has been unable to issue, it has had to deplete its General Account held at the Federal Reserve in order to keep government services running (chart 12). That account has declined by roughly half a trillion dollars since the peak earlier this year and coming out of the tax season. At US$364 billion, Treasury’s cash holdings have been performing similarly to the last episode in 2023 when they approached zero.

The impact on the Treasury market is through two forces. Relative scarcity is created by the suspension of debt issuance against a backdrop of constantly rising demand for fixed income instruments. Treasury cash deployment into bank reserves results in more liquidity chasing these scarce instruments. I think that’s part of why we’ve seen the US 10-year yield come off the 4.8% peak earlier this year down by about 50bps lower now.

As the debt ceiling is lifted, a gusher of new debt supply is likely to be aimed at replenishing Treasury’s cash holdings. This could mean a half trillion of above-trend debt issuance. Quarterly refunding schedules and marketable borrowing estimates are likely to implement bigger and more frequent auctions in this period. That could mean a temporary surge in Treasury yields over the summer, but not a durable one. This would be a replay of what happened in 2023.

The longer it takes to pass a bill, the more pent-up debt issuance there will be in order to replenish Treasury’s cash holdings.

GLOBAL MACRO—LESS ON THE LINE

Other global releases are summarized in chart 13. Other than nonfarm payrolls, the main focal points will be Eurozone inflation and US ISM readings.

Eurozone CPI for June will be updated on Tuesday. We already know that France came in hotter than expected and inflation picked up in Spain and so markets are somewhat primed for a firm reading. Germany and Italy will release on Monday by which point we’ll have a good idea of the Eurozone tally. Key may be continued progress on services inflation (chart 14) and little pass through of tariffs into goods. Still, the ECB is nearing the end of its easing cycle with a policy rate of 2% and may have a small amount of further easing to deliver, but there is much less on the line with this inflation reading than earlier ones in terms of the bias.

Watch the ISM-manufacturing (Tuesday) and services (Thursday) signals and anecdotes for more advanced indications of the impact of tariffs on supply chains including price effects. Recent reports have been littered with comments from industry participants about the destabilizing impact of tariffs.