
US/Japan: Warsh’s dilemma. US Fed’s new FOMC Chair, Kevin Warsh, surprised markets with a hawkish tone last week but did not assign his own forecast to the dot-plots. We think two metrics will be critical for policy consideration. First, core inflation – if it heads past 3.5% in May-Jun even as energy prices correct. Second, real wage growth, which has turned negative due to rising inflation. If that begins to rebound and moves into positive real growth territory, the Fed will be out of excuses to maintain a policy pause.
Political pressures on the Fed to cut rates appear to be moderating. Addressing questions on whether Fed Chair Warsh could face pressure from Trump, Treasury Secretary Bessent noted that Trump has said Warsh will be independent. Warsh may face less pressure than his predecessor on rate decisions, given Trump’s awareness of the negative impact on bond markets from such actions.
That said, the US economy continues to display resilience. The weekly ADP employment change (on a four-week moving average basis), released on 23 Jun at 30.75k, has reversed its downtrend. This indicates that private sector hiring remains sturdy. Initial jobless claims are on the rise, albeit remaining relatively low (consensus at 225k). The labour market demand-supply balance is largely steady. Thus far, both the labour force and total job opportunities (employment + job openings) stand at approximately 170mn. Beyond the labour market, both the S&P Manufacturing and Services PMIs continue their upward march and have beaten market expectations. Separately, market consensus project next week’s nonfarm payrolls release to show a 130k gain in June, with the unemployment rate remaining unchanged at 4.3%. The Conference Board Consumer Confidence Index is also projected to improve to 94.2 in June from 93.1 in May.
Market sentiments are improving on news that Middle East talks are slated to continue next week, according to a Pakistani official. Brent prices have slipped below USD70/bbl, returning to pre-conflict levels and signalling a normalisation in supply conditions.
Separately, Japan PM Takaichi has unveiled a JPY370tn (USD2.3tn) investment plan to be financed through public-private partnerships by fiscal 2040, aimed at strengthening economic security and supporting long-term growth. The plan spans 17 strategic sectors and 62 designated products and technologies, including semiconductors, AI, quantum technology, and energy. Semiconductors will receive a large allocation of JPY68tn, with further details to be finalised soon. While increased investment is necessary to support Japan’s growth outlook—and the country has historically executed effective industrial policy—its elevated public debt burden could be a constraint for ambitious initiatives.

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