In what is a quiet start to the week, US-China trade developments, US inflation, US and China retail sales and key UK data, will dominate market sentiment. On Tuesday German ZEW expectations, UK unemployment and US CPI will garner market attention. We will later hear from the Fed’s Barkin (and again on Thursday). The central bank’s Bostic speaks on economic outlook, while his colleague Goolsbee discusses monetary policy on Wednesday. Eurozone and UK GDP, and industrial production figures follow on Thursday, and we have US PPI and initial jobless claims. China retail sales, industrial production and fixed asset investment kick-start Friday, and later we have the US retail sales, Uni. of Michigan sentiment, industrial production and Empire State manufacturing figures.
Last week markets were dominated by tariff deals and trade policy uncertainty, dovish statements from the Fed that increased expectations for future rate cuts, and mixed corporate earnings reports. The yield on the 10-year UST closed 7bps higher at 4.28%, while the S&P Index gained 2.43%. The dollar fell ~1% amid dovish Fed expectations. Brent crude plummeted 4.42% to $66.59pb, driven by market optimism about upcoming US-Russia talks on a potential peace deal in Ukraine, which could increase global supply. OPEC+ raising production and a general concern about slowing global economic growth added further downward pressure.
US data prints signalled further weakness with factory orders and durable goods plummeting in June, the latter driven by a sharp fall in transportation equipment orders. The ISM services index surprised to the downside sitting just above the 50 threshold. Although prices paid remind strong, new orders slipped and employment contracted further.
Broadly dovish messaging from the Fed came from Cook, Kashkari and Daly following the disappointing employment report which increased expectations of a cut in September; the futures market is pricing two cuts this year. Kashkari noted his concerns that “The economy is slowing”. Signalling a change in position, he now supports rate cuts in the “near term”. He noted that it may be worth making “some adjustments and then we have to pause, or even then we have to reverse course” suggesting it may “be better than just sitting here on hold until we have clarity on tariffs”.
Closer to home the BoE cut rates to 4%, in-line with expectations, in a close 5-4 split. Governor Bailey stated that the policy path is now less certain given new forecasts warn that inflation could spike to 4% (from previous expectations of 3.7%) by September.
Elsewhere, China’s economic data remained mixed, with a significant rebound in foreign trade but persistent deflationary pressures. Exports grew by 7.2% and imports saw their largest year-on-year increase since July 2024, at 4.1%, beating market expectations and suggesting a potential pickup in domestic demand. However, inflation data released this morning painted a more cautious picture. While CPI was flat year-on-year, narrowly avoiding deflation, PPI continued its long-standing decline, falling 3.6% for the 25th consecutive month. This persistent factory-gate deflation, which is squeezing corporate profit margins, highlights the ongoing challenge of weak domestic demand and overcapacity in key industries.
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