US inflation for July came out exactly as expected and there was little news elsewhere to move markets. Stocks, bonds and the dollar all closed Friday almost exactly where they had opened Monday, in a typical week of slow summer trading. The war in Iran seems to be settling into a long-term context of economic resilience between the US and Iran, and is for now providing few market moving headlines. Federal Reserve officials are keeping their cards close to the chest regarding the upcoming September meeting, and an ECB hike that same month seems certain. The big mover of the week was the Brazilian real, which was caught in the sell off of Brazilian assets on concerns about a left-wing victory in the upcoming presidential elections.
This week is also shaping up to be a quiet one in markets. The main event will be the worldwide release of the August Purchasing Managers' Index (PMI) data on Friday. This will be of particular importance in the Eurozone, due to the lagged nature of hard economic data there. A spate of UK June/July labor reports on Tuesday and the inflation numbers there on Wednesday will be key for Sterling. The minutes of the last Federal Reserve meeting released this Wednesday could also attract more attention than usual given the US central bank's turn toward fewer communications and less forward guidance.
EUR
Positive economic momentum in the second quarter, as well as stubborn inflationary pressures (which may be worsened by the low Rhine levels and their impact on transportation costs) mean markets are pricing near certainty of another ECB hike at its September meeting. We do not disagree with this view, which is one of the reasons we continue to forecast a gently rising Euro into 2027. This week, a healthy PMI release consistent with steady growth, and a second-quarter negotiated wage release that is expected to show another increase should further validate our views.
USD
Both demand and pricing pressures in the US seem to be moderating. Monthly core inflation prints have averaged about 0.2% since the war started, consistent with an annualized level of just above 2% and showing little sign of spillover from higher energy prices. While we do not fully trust the labor market surveys, hard data like retail sales seems to confirm the moderating path of demand. Just one labor market report and one inflation report remain before the Federal Reserve September meeting. We think it is ulikely that the numbers will surprise to the upsude enough to allow the hakws to force a rate increase, and are comfortable with our call of no change in rates.
GBP
Quarterly and monthly GDP data from the UK confirmed that the economy was growing at a decent pace of about 1.5% a year around the time Andy Burnham took over as prime minister. It will be interesting to see if the momentum carries out to the third quarter of 2026, where his premiership can start taking either the credit or the blame for the evolution of the economy. This week's inflation and labor numbers are key for the Bank of England to decide whether to hike rates in 2026; we are still expecting them not to, and the market seems to be slowly converging to our view. We expect the core subindex to continue converging to the central bank target and post a small drop to 2.5% annualized.
