Labor data from the US added further ammunition to the doves in the Federal Reserve, and rate markets continued pushing back their expectations of hikes in the US. The dollar lost ground against every major peer worldwide, with the conspicuous exception of the Yen. However, the Japanese currency is up massively over the last two weeks due to aggressive intervention by Japan and the US, so last week's weakness should be put into perspective.Beyond currency markets, bond prices have stabilized and equity prices continue to hit records, as investors choose to ignore for now the lack of progress in talks between the US and Iran and stubbornly high oil and distillate prices.
All eyes are now on the US inflation report for July, out Wednesday. US inflation has shown so far little sign of second round effects. This report is one of two remaining before the key Fed September meeting, so another midl inflation report like markets are expecting could help seal the decision for no change in rates then. We will also pay attention to a slate of big Treasury bond auctions throughout the week. UK GDP data for the second quarter of 2026 out Thursday will also be a key, albeit lagged, reading.
GBP
Gilt markets seem to have stabilized lately, and markets are taking their cue from the modestly positive tone in economic data out of the UK. For now, noises suggesting that Andy Burnham may take a relaxed view of the UK fiscal rules are being ignored, and Sterling is joining in the generally good performance of British assets. This week's quarterly GDP numbers are expected to show an economy still buoyed by government spending, as private investment lags. This is not the best basis for future growth, but for now markets deem it good enough.
EUR
In a generally light data week, national reports suggest the German economy is finally benefitting as the large fiscal package from 2025 filters through. Eurzone high frequency indicators such as the PMI indices have rebounded, suggesting that the economic momentum from the surprisingly strong second-quarter growth numbers is carrying into the third quarter. Markets are pricing in an 80% chance of a second hike at the September ECB meeting, which is helping the euro continue its rally against the dollar.
USD
A weak labor market report on Friday surprised to the downside, though other labor indicators continue to indicate little change in job market dynamics in the US: restrained job creation that is nevertheless sufficient to absorb the diminished supply of workers. We see little reason to change our views of the US economy. As for the Federal Reserve, recent labor and inflation data reinforce our view that the central bank will hold rates unchanged in September. The next test of our view is the July inflation report on Wednesday, but we think it would take an unlikely significant upside surprise to tip the balance of FOMC voters towards a hike at the September Fed meeting.
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