The Week Ahead
The ECB forum (Mon-Wed) and the US employment report (Thu) are some of the key events this week. Today we have Germany CPI, UK GDP and US MNI Chicago PMI prints. We will hear from the ECB’s Lagarde at the ECB Forum, and the Fed’s Bostic on the US economic outlook, and Goolsbee. On Tuesday, China Caixin manufacturing PMI, Eurozone CPI, UK house prices and the US ISM manufacturing, job openings, and construction spending readings will garner market focus. The Fed’s Powell, ECB’s Bailey, BoJ’s Ueda all speak at the ECB Forum. Eurozone unemployment, and US ADP employment figures will be of interest on Wednesday. The ECB’s Lane, Guidos and Cipollone lead panels in Sintra, followed by Lagarde’s closing remarks. China’s Caixin services PMI kick-starts Thursday. Given the US is closed for Independence Day celebrations on Friday, key data points will instead feature on Thursday, including US non farm payrolls, and unemployment, ISM services, and factory and durable goods orders. On Friday we have eurozone PPI and Germany factory orders.
Global markets saw a notable improvement in risk appetite last week, driven by a de-escalation in Israel-Iran-US tensions. US data was on the weaker side, and we heard a lot from the Fed, whose independence was questioned once again, resulting in the dollar fall, the DXY index closed the week 1.32% lower. USTs enjoyed a 10bps rally to 4.28%, and the S&P Index rose 3.44%. Oil pared earlier weeks’ gains, amid easing geopolitics and the possibility for further OPEC+ output increases in August. Brent crude closed 12% lower, at $67.77pb.
US economic data presented a mixed picture. While manufacturing and services PMIs for June came in better than expected, overall growth was partly boosted by stock building, linked to tariff concerns, a factor likely to unwind. Crucially, the US Conference Board Consumer Confidence Index fell sharply in June, with widespread deterioration in both current conditions and future expectations, with tariffs frequently cited as a concern. Adding to the complexity, the US Q1 2025 GDP was unexpectedly revised downward to an annualised contraction of 0.5% from a prior estimate of -0.2%, primarily due to a sharp revision in consumer spending and a surge in imports ahead of anticipated tariffs. Despite this, high-frequency data continues to point to a potential rebound in Q2 growth.
During his testimonies last week, Fed Chair Powell avoided committing to rate cuts at the July meeting, emphasising that policymakers need more data on whether tariff increases will drive inflation higher, with June and July inflation figures particularly crucial. He dismissed concerns about the dollar's global dominance, calling narratives of decline "premature and overdone," while acknowledging the US faces an unsustainable borrowing path with no clear tipping point for debt concerns. Powell also noted that immigration policy changes have slowed labour force growth as worker demand has also declined. On housing, which is clouded in uncertainty, Powell stated that the central bank has no long-term influence on housing supply and demand dynamics. Expectations for Fed rate cuts rose, with futures closing the week pricing in over 2.5 rates cuts this year. This followed the slightly more dovish signals from Powell’s colleagues, including Bowman and Goolsbee, who both hinted at potential cuts if inflation remains contained or tariff-related "dirt" clears.
Meanwhile, the Bank of England is observing increasing evidence that businesses are responding to higher national insurance contributions by cutting hiring, working hours, and pay, signalling a softening in the jobs market. BoE Governor Andrew Bailey suggested that interest rates are likely to remain on a gradual downward path, anticipating a slowdown in growth after a strong first quarter. While he stressed the need for a restrictive monetary policy to curb persistent inflation, he noted that recent price increases from duties and utility bills are not expected to trigger lasting domestic inflationary pressures.
Elsewhere, China's economic data showed mixed signals. While policymakers expressed growing optimism about recovery trends, hard data revealed persistent challenges, particularly negative industrial profit growth and weak inflation pressures from ongoing price wars in key sectors like automobiles. This morning’s June manufacturing and non-manufacturing PMI prints surprised to the upside, though manufacturing remains in contraction. Despite increased confidence in the recovery trajectory, the Chinese economy remains trapped in a disinflationary cycle that will require coordinated fiscal expansion and further monetary easing to overcome structural headwinds and lift nominal GDP growth.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.