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New York Fed President John Williams said he remains confident inflation will gradually resume its decline, arguing that the recent surge in energy prices is unlikely to derail the broader disinflation process. Speaking to Reuters on Friday, Williams said that if energy prices and tariffs have peaked and the economy remains resilient, "some of the big drivers that pushed up inflation... will not be at play as much," while "some of the disinflationary forces that we've been seeing should reassert themselves." He added that his personal forecast is for inflation to ease during the second half of this year and decline further next year.

Rather than focusing on temporary supply shocks, Williams emphasized that the Fed is watching whether underlying inflation is returning sustainably toward target. "I am... focused quite a bit on what are we seeing in the core inflation data over the next several months," he said, adding that policymakers need evidence inflation is on "a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028." Williams reiterated that the current policy stance is "well positioned" following last week's decision to leave the federal funds target range unchanged at 3.50%-3.75%.

Still, Williams made clear that the Fed remains prepared to tighten policy again if inflation fails to cooperate. "If the economy is not on a trajectory that will bring inflation back down to 2%... it would absolutely be appropriate to act," he said. While acknowledging uncertainty surrounding the Middle East conflict, Williams said he does not expect it to generate persistent inflationary pressure under his base case, assuming shipping disruptions eventually ease. He also stressed that the Fed will make its own policy assessment rather than follow financial market pricing, saying it would "absolutely not" be bound by investors' expectations.

Key Takeaways

• Williams remains confident that inflation will continue to ease, expecting disinflationary forces to reassert themselves if energy prices and tariffs stabilize.
• The Fed's primary focus has shifted to core inflation, with Williams emphasizing that the next several months of underlying inflation data will determine whether inflation is on a sustainable path back to the 2% target.
• He reaffirmed that current monetary policy is "well positioned" after last week's decision to leave rates unchanged at 3.50%-3.75%.
• Despite his constructive inflation outlook, Williams made clear that further rate hikes remain on the table if inflation fails to move convincingly toward target.
• Williams views the inflation impact of the Middle East conflict as likely temporary under his base case, assuming shipping disruptions eventually ease.
• He also stressed that the Fed will not be guided by market pricing, reiterating that policy decisions will be based on the Fed's own assessment of incoming economic data.

The UK's manufacturing sector lost some momentum in July, with the final S&P Global Manufacturing PMI easing to 51.9 from 52.5 in June, its lowest level in four months. Even so, the index remained above the 50 threshold for a ninth consecutive month, indicating that the sector continues to expand despite a moderation in the pace of improvement.

The details of the survey painted a more encouraging picture than the headline suggested. Manufacturing output rose for a fourth straight month, with production growth accelerating to its fastest pace in nearly two years as stronger market conditions boosted new orders and export demand. Four of the five PMI components remained consistent with improving operating conditions, while the decline in the headline index mainly reflected a sharp reduction in stocks of purchases, slower hiring and a smaller deterioration in supplier delivery times. Growth, however, remained uneven, with medium and large manufacturers outperforming smaller firms, where production declined modestly.

S&P Global also pointed to improving supply and cost conditions. Input cost inflation slowed to a five-month low as supply-chain delays eased to their weakest level since the outbreak of the Middle East conflict, offering manufacturers some relief after months of disruption. Although hiring growth nearly stalled, the first increase in backlogs of work in more than four years suggests labor demand could strengthen if new orders continue to improve. Still, business confidence remained subdued, with geopolitical developments, global trade tensions and the new UK government's industrial and tax policies likely to shape the outlook in the months ahead.

Economic Data

Market Takeaways

• Manufacturing PMI eased from 52.5 to 51.9, a four-month low, but remained above the 50 threshold for a ninth consecutive month, signalling continued expansion.
• Factory output accelerated to its fastest pace in almost two years, supported by stronger domestic and export demand.
• The softer headline PMI largely reflected lower stocks of purchases, slower hiring and a smaller deterioration in supplier delivery times rather than weaker demand.
• Input cost inflation slowed to a five-month low, while supply-chain delays eased to their lowest since the outbreak of the Middle East conflict, providing relief for manufacturers.
• Employment growth nearly stalled despite stronger production, although the first increase in backlogs of work in more than four years suggests hiring could improve if demand remains firm.
• The recovery remained uneven, with medium and large manufacturers outperforming smaller firms, where production continued to decline modestly.

UK PMI Manufacturing final release here.

Eurozone manufacturing extended its recovery in July, with the final S&P Global Manufacturing PMI rising to 51.9 from 51.4 in June, marking a three-month high and the strongest improvement in factory conditions since April. Factory output was an even brighter spot, with the Output Index jumping to 52.9 from 51.7, its highest level in 52 months, suggesting production continued to accelerate at the start of the third quarter.

Beneath the headline strength, however, the survey painted a less convincing picture of demand. Output growth was supported largely by manufacturers working through existing order backlogs rather than a meaningful pickup in new business. While new orders continued to increase, the pace remained sluggish, prompting firms to rely on orders secured in previous months to keep production lines running. At the same time, manufacturers continued to trim headcounts, reflecting concerns that current demand may not be sufficient to sustain production once existing backlogs are exhausted.

The recovery also remained highly uneven across the region. Germany led the way with one of its strongest PMI readings in more than four years, while Italy stayed in expansion despite losing some momentum. By contrast, manufacturing activity in France and Spain was broadly stagnant, underscoring the uneven nature of the region's industrial recovery. According to S&P Global's Chris Williamson, several economies continue to struggle with weak demand, elevated prices and lingering supply constraints despite recent improvements.

The survey also suggested that geopolitical risks remain an important headwind. Although supply bottlenecks and energy-related cost pressures eased somewhat in July, tensions in the Middle East continued to keep supply chains under strain and energy prices elevated. With new orders still growing only modestly, the durability of the current recovery will depend on whether demand strengthens enough to replace the backlog-driven boost to production. Until then, the impressive rise in output may prove stronger than the underlying health of the manufacturing sector.

Economic Data

Market Takeaways

• Eurozone Manufacturing PMI rose from 51.4 to 51.9, reaching a three-month high and signalling the strongest improvement in factory conditions since April.
• The Output Index jumped from 51.7 to 52.9, its highest level in 52 months, pointing to a sharp acceleration in manufacturing production.
• Production growth continued to outpace demand, with manufacturers relying on existing order backlogs as new orders increased only modestly.
• Germany remained the region's manufacturing leader, while Italy stayed in expansion despite slowing. France and Spain were broadly stagnant, highlighting an uneven regional recovery.
• Manufacturers continued to reduce employment, reflecting concerns that current production may not be sustainable without a stronger pickup in new business.
• Although supply bottlenecks and energy-related cost pressures eased slightly, Middle East tensions continued to keep supply chains under strain and inflationary pressures elevated, posing risks to the durability of the recovery.

Full Eurozone PMI Manufacturing final release here.