GBP

The run of dismal UK data that started two weeks ago continued last week. Inflation came out higher than expected, while retail sales collapsed by 2.7% month-on-month in May, far worse than expected. This run of soft data adds to the stagflationary gloom, and comes hot off the heels of the worst month of job losses since the pandemic last month.

The Bank of England kept rates unchanged, as expected, last week, but the dovish vote (three dissenters were in favour of cutting rates immediately) suggests that the MPC is becoming increasingly concerned with the growth outlook and the performance of Britain’s labour market. The forward guidance on rates was, however, kept unchanged, with officials again saying that future cuts would be both “gradual and careful”. While this ensures that an August cut is not entirely set in stone, swap markets are still largely pricing in another rate reduction at the next meeting and a total of two further cuts by year-end.

EUR

There wasn’t much in the way of market moving economic or policy news out of the Eurozone last week. The former continues to be muddled by the effects of the first-quarter effort to export goods into the US ahead of Trump’s tariffs. Consequently, the euro traded almost exclusively off events elsewhere, particularly the Israel-Iran war, and generally suffered from soaring oil prices and Europe’s status as a huge energy importer – the US, by contrast, is now a next oil exporter.

This week appears to be more of the same, with the common currency opening the week lower as oil prices continue to march higher. The release of the June PMIs on Monday is the main event this week in the Eurozone. The composite number has been hovering around the 50 level that separates contraction from expansion in the past few months, and economists are expecting a slight increase this week.

USD

While market focus has moved away from macroeconomic data and monetary policy, last week was full on both fronts. Data continues to paint a mixed picture. The housing market is performing particularly poorly, while the jobs market has continued to show signs of a moderate cooling, notably in the weekly jobless claims figures. Other indicators are holding up somewhat better, and the Atlanta Fed GDPNow estimate is currently pointing to a strong rebound in US growth in the second quarter of around 3.5% annualised.

The Federal Reserve acknowledged this uncertainty during its latest policy meeting last week. The fed funds rate was kept unchanged, as was universally expected, although the FOMC sounded a slightly more hawkish note than had been priced in, with Chair Powell again describing the US economy and labour market as “solid”, while he brushed aside the soft May CPI report. However, recent weakness in labour market data is prompting some policymakers to veer towards an earlier cut. We do not think any of these dichotomies will be resolved until we get at least one more data point each of payrolls and inflation.