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Fed-ex?

21 Jul 2025 | 3 minutes to read

A good week for

  • Asia-ex Japan and EM equities, gaining +2.5% and +2.3% respectively (in sterling terms)
  • US equities advanced +1.4% (in sterling terms)

A bad week for

  • Most government and corporate bond indices were negative, except UK High Yield (+0.1%), in local currency terms
  • Brent crude oil slid -1.5% in dollar terms

UK inflation and job data complicate rate cuts

UK inflation reached an annual rate of 3.6% in June. Economists had expected the Consumer Prices Index (CPI) to stay at 3.4% as reported in April and May. Higher food, energy and core goods costs – such as clothing and transportation – recorded notable increases. But the persistent rate of services sector inflation will trouble the Bank of England (BoE) most as they mull over the appropriate monetary policy response. Although inflation remains above the BoE’s 2% target, rate-setters are still expected to resume rate cuts from August or September. UK labour market data will influence their decision. Payroll data last week provided continued signs of gradual weakening, but no more. Employers shed an estimated 41,000 jobs in June, 6,000 more than consensus. However, losses in May were heavily revised, from a drop of 109,000 to one of just 25,000, and revisions to prior months also indicate a gradually easing labour market. The headline payroll figures also exclude self-employment, where numbers have been increasing. The unemployment rate increased marginally from 4.6% to 4.7% in the three months to May.

Will potential ‘stagflation’ delay UK rate-cuts?

UK economic data paints a challenging picture: inflation is rising, the labour market is weakening and growth remains sluggish. UK businesses appear to be passing on higher costs of increased national insurance contributions and the rise in the minimum wage – by raising prices, helping to fuel inflation.

This mix may presage ‘stagflation’ – an unwelcome scenario for the Bank of England’s Monetary Policy Committee (MPC) to address when it next sets interest rates on 7 August. The data give the MPC less flexibility to lower borrowing costs for households as this could exacerbate inflation. Pressure may also mount on Chancellor Reeves to consider tax rises in the Autumn Budget to maintain fiscal credibility. In recent weeks, the rising benchmark 10-year Gilt yield suggests bond investors may already be losing confidence in the UK’s economic outlook. But Reeves’ Mansion House Speech last week gave little away.

An August or September 0.25% rate cut remains on the table, with another likely this year – but challenging data makes this far from certain.

Fed-ex? Trump ups the ante on US Fed

President Trump risks undermining the independence of the US Federal Reserve and investor confidence by speaking of ousting its current chairman, Jerome Powell. Trump believes Powell should press to lower interest rates significantly to juice up the US economy. Powell is due to remain in post until May 2026. But fears of an imminent political appointment are a developing tail risk. Last week the US dollar index fell by 1.2% - before quickly recovering - after Trump asked a group of republican lawmakers whether he should fire Powell. Trump and Republican allies are attacking Powell on two fronts. Trump wants as much as a 3% interest rate cut from the current level of 4.25-4.5%, despite the Fed airing concerns regarding higher inflation - mostly due to Trump’s tariff policies. Republican allies are also claiming Powell is responsible for an estimated $700m overspend on the $2.5bn renovation of the central bank’s Washington building. It’s for this perceived maladministration that White House officials have floated the idea of Powell’s demotion for “cause”, a legal word for misconduct. The renovation of this old and apparently badly-built headquarters is reportedly the most expensive project in Washington, DC.

At this point in time, financial markets seem to expect Powell to serve out his term. However, Trump’s desire for a political appointee who will listen to him, with a preference for lower interest rates, may yet prove uncomfortable for investors.

European Commission unveils €2 trillion budget

Two years of wrangling lay ahead for the EU’s 27 member states after the EC released its budget proposal last week. The plan would increase the bloc’s spending from 1.1% to 1.26% of members’ gross national income between 2028 and 2035. It earmarks a fivefold increase to defence spending and cuts to farming subsidies.

Countries including France may suffer a backlash over any proposals on trade and budgets. France PM Bayrou last week suggested scrapping two public holidays to save money. France has a debt-GDP ratio of ~113%, a fiscal deficit of 5.8% and an unemployment rate of 7.4%. Policymakers are also under pressure to deliver a plan to deal with the US’s proposed 30% tariffs on EU exports

Other insights

  • The FTSE100 topped 9,000 for the first time
  • Bitcoin hit record highs over $120,000 on hopes the new US GENIUS act will facilitate stablecoin issuance – a type of cryptocurrency backed by a fiat currency such as the dollar, or gold, used for everyday spending
  • The US lifted a ban on NVIDIA selling its top-end H20 Artificial Intelligence chips in China
  • Q2 US earnings season kicked off last week with very strong earnings from the big banks, including JPMorgan and Citigroup

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