ACM Update 21-07-25
The performance of the UK economy remained under the microscope last week, as May’s unemployment rate rose, and June’s inflation reading followed suit. Both are pushing in opposite directions from a monetary policy standpoint, but we still expect a UK interest rate cut on 7th August.
US news was once again Trump-dominated, as the Dollar whipsawed around on Wednesday amidst comments (later reclarified) that he was about to sack Fed Chairman Powell. The long-awaited nudge up in US inflation also materlialised.
The major event of the coming few days will be the latest ECB meeting in Frankfurt. This is expected to deliver a hold in interest rates, their first in eight meetings.
As he has for the last year or more, Donald Trump continued to stir up a frenzy in financial markets last week. Wednesday afternoon saw suggestions from the President that he may look to remove Chair Powell from his post, in relation to a $2.5bn renovation to the Federal Reserve. Trump stated the “little extension onto the Fed” had been mismanaged, and when asked if he felt it a sackable offence “I think it sort of is”, came the reply.
Markets moved violently as a result, with the US Dollar changing hands one per cent in either direction in the space of an hour or so. Such events can be a warning to those with Dollar-related exposures at present, that markets will move quickly based on these unforeseen circumstances.
An hour or so later, Trump clarified that he had no intention to sack Powell (for now), restoring some sense of calm to currency, bond and stock markets.
In fundamental economics, the long-expected nudge up in US inflation as a result of tariffs, eventually materialised in June. US CPI inflation moved to 2.7% in the month, up from 2.4% in May and also higher than forecasts. In fact, the figure could have been worse, had it not been for a fall in car prices which helped soften the blow.
Tariffs now seem to be getting passed on more to consumers in the US, nudging inflation that bit higher. Products such as toys rose in price by the most in four years, for example. From a monetary policy perspective, there was both evidence that tariffs may cause a “one-time shock” or remain a consistent cause for concern.
A muddy picture still for the Federal Reserve and markets still (currently) expect interest rates to be held on 30th July. This is both seen as a current requirement, and to pre-empt concerns about the inflationary impact of Trumps larger tariffs to come, against the EU for example.
From the evidence last week, their own policymakers still seem in favour of holding policy. Rate-setters Barkin, Bostic, Williams & Collins all suggested that the inflationary impact was only just starting, the outlook was uncertain and there are concerns about lower hiring. The only outlier, as is often the case, came from Christopher Waller, maintaining his calls for a rate cut next week.
Everyday Americans meanwhile seem to be happier about the economic state of play. The latest University of Michigan consumer sentiment figures showed their most optimistic in five months, whilst inflation expectations fell to the lowest in the same timeframe.
Overall, a slight Dollar recovery last week versus GBP again, with Wednesday afternoon’s volatility visible also. The GBP-USD chart is below:
UK news remained disappointing, with both inflation and unemployment data not delivering what was hoped. The CPI data came first on Wednesday morning, displaying a rise in the metric to 3.6% and the highest in almost 18 months. Rising prices in areas such as food, clothing and rail fares were a contributory factor in the jump.
This was higher than most economists had been expecting of 3.4% but does fall in line with broad expectations for inflation to hit 4.0% during the latter part of the year. The June rise does in turn complicate matters for the Bank of England in three weeks. A slowing economy and rising inflation are not normally the perfect combination to lead to a rate cut.
UK jobs figures also painted a concerning picture in the three months to May. Unemployment has been on a steady rise since October, now reaching 4.7% in the latest figures. This marks the highest in four years for reading, whilst the number of open vacancies has been heading down continuously for three years.
Even prior to this data, Bank of England Governor, Andrew Bailey, had stated that there could be larger interest rate cuts if the jobs market shows signs of slowing. Markets read into this accordingly, seeing GBP lose ground. But with the unemployment, inflation and economic growth mixed bag of data, the cut/hold decision is now more in the balance than it was a few weeks ago.
Average earnings (wage growth) data meanwhile, continues to come back down. The reading is now 5.0% for May, the lowest since September 2024’s data and logically should help inflation come down as the gap between price growth and wage growth narrows.
We also had G20 Meetings taking place last week, which saw Andrew Bailey putting on his other hat as the head of the group’s Financial Stability Board. In this, he stressed to other central bank heads the need for international cooperation to achieve financial stability, as uncertainty continues to weigh on global growth.
In the Eurozone, last Monday was a French bank holiday….. but they might well be about to lose a couple of others by the sound of it! Prime Minister Francois Bayrou, last week promised to cut the country’s bank holiday count from eleven to nine, in order to rebuild the national finances. These follow the previously very popular moves of raising the pension age and cutting taxes on the wealthy.
The chances of the no majority government getting the bank holiday proposal through seem slim, however. But apparently, every second that passes, France currently has €5,000 more debt. Ouch.
On the tariff front, the EU remains in the firing line for Trump as he continues to throw percentages at them ahead of his (latest) 1st August deadline. Will it be TACO or tariff this time around though?
If the latter, the EU are ready to fight though. The bloc are ready to use their “Anti-Coercion Instrument” which is aimed to protect member states from economic coercion by other countries. This gives them the ability to create retaliatory measures, such as taxing US tech giants, or restricting US investments into the EU. Support for using this method is already building, with more than half a dozen EU nations backing the move.
On the data front itself, matters were a little quieter as we would expect so close to an ECB meeting. EU inflation remains the star pupil, sitting nicely at 2.0% in June, bang on target. Economic sentiment figures for the entire bloc were slightly below forecast, but still their second best in the last year. The German equivalent saw the highest reading in three and a half years as the recovery there continues.
Sterling-Euro barely moved 0.5% last week, despite the poor UK data. Movements on the pair can be seen in the chart below.
The week ahead:
Monday – Japan Upper House elections, UK Rightmove HPI data (00:01 UK time)
Tuesday – Reserve Bank of Australia Meeting Minutes (02:30), UK Public Sector Net Borrowing (07:00), BoE Bailey speech (10:15), Fed Powell speech (13:30)
Wednesday – US Existing Home Sales (15:00)
Thursday – UK/EU/US Manufacturing & Services PMIs (08:15-14:45), ECB Rate Announcement (13:15) & Press Conference (13:45)
Friday – UK Retail Sales (07:00), US Durable Goods Orders (13:30)
The next three weeks contain central bank meetings from each of the big three, with the ECB, Federal Reserve and Bank of England, in that order. With Frankfurt up first, their decision looks to be the most nailed on, with a pause to their year-long run of interest rate cuts widely projected. Are they done with cuts though? The Lagarde press conference may well give us some clues as to what is to come and indeed the ongoing prospects of the Euro.
Aside from that, Tuesday will be busy with speeches from Andrew Bailey and Jerome Powell. The two central bankers have big decisions coming up, in economies with slow growth and inflation back on the rise. As always, they are only one person of their respective committees, but their comments hold more weight than most.
UK retail sales also make an appearance later on in the week, as well as the latest round of PMI output figures from the UK, Europe and the US. Not to mention any Trump-related shenanigans as we move closer to his latest potentially moveable deadline.
For any upcoming requirements, make sure to reach out to your Aston contacts to discuss optimal away to protect yourself from market volatility.
Have a great week.
