US inflation was the only tier-1 data point on the global front this week. While it was close to expectations it provided some relief in markets that there are still no strong signs of rising inflation from tariffs. Core CPI increased 0.3% m/m in line with expectations giving a small lift to the annual rate from 2.9% y/y to 3.1% y/y, see Global Inflation Watch – Still no clear signs of tariff-driven inflation, 12 August. Interestingly, it looks like the modest acceleration in core inflation was driven mostly by services (both shelter and non-shelter). A big upward surprise in PPI inflation on Thursday led to some reversal of the relief as it could suggest the tariff impact is simply just delayed.
Yields ended up broadly flat over the week while risk sentiment had another good week. A 25bp cut by the Fed is now fully priced in September and the market looks for another four 25bp cuts by the end of next year. It is partly fuelled by expectations that US President Donald Trump will select a dovish Fed governor in 2026 when Jerome Powell’s term expires in May. Markets are now in line with our own Fed forecast and we see limited scope for further declines in bond yields. The list of candidates to replace Fed governor Powell widened this week with several private sector candidates now in the field. Treasury Secretary Scott Bessent said on Wednesday around ten candidates are considered.
Trump this week nominated a new head of Bureau of Labour Statistics replacing Erika McEntarfer who was fired after the recent labour market report showed weaker payrolls. Trump’s candidate is E.J. Antoni, a conservative economist who has been highly critical of the payrolls data. Trump posted that “E.J. will ensure that the Numbers released are HONEST and ACCURATE.”
In Europe it was quiet on the data front. The German ZEW expectations index dropped from 52.7 to 34.7 but this follows a period of steady increases, and the level is still solid. The Euro Economic Surprise Index is clearly in positive territory. Market expectations for the ECB rate this year did not change much with the market still seeing around a 50-50 chance of a further rate cut of 25bp from the current level of 2.0%. Long-term yields moved lower, though, driven by spill-over from the US. We expect the ECB is done easing and will be on hold for a long time now.
In China, credit data softened a bit but are overall still robust. The credit expansion is driven by government issuance, though, whereas private lending is weak. It underpins the picture that growth is held up by stimulus measures and still decent exports. Chinese leaders still struggle to lift private demand, and housing and consumption remains the weak links.
US and China extended a trade truce by another 90 days as widely expected and tensions between the two countries have eased somewhat. This contrasts with Trump’s growing frictions with India and Brazil leaving him in confrontation with most of the BRICS countries. A meeting between Trump and Putin in Alaska on Friday has been widely anticipated but takes place after deadline of this publication.
Next week focus turns to Flash PMI data for August in US and euro zone as well as FOMC minutes, euro negotiated wages and Japan CPI.
. A big upward surprise in PPI inflation on Thursday led to some reversal of the relief as it could suggest the tariff impact is simply just delayed. ){kind=link}