Markets
This week’s benign US CPI and PPI (June) figures didn’t resonate in Fed rhetoric. Dallas Fed President Logan (2026 FOMC voter) called for modestly higher interest rates as inflation “does not appear to be on track all the way back to 2%” while upside risks remain. Kansas City Fed Schmid thinks it is premature to put too much weight on one data point in an echo of Fed Chair Warsh’s suggestion earlier this week that it isn’t mission accomplished. Schmid also threw the new rise of energy prices in the mix. Fed vice-chair Jefferson currently believes that the Fed is well-positioned, but it could be appropriate to reconsider that stance if inflation doesn’t ease. Markets took the data rather than the Fed speak into stride though with Fed July rate hike bets falling from almost 50% at the start of the week to currently only 10%. A 25 bps move is now fully discounted by the December instead of the September FOMC meeting. Today’s eco calendar contains import/export prices, housing data, industrial production figures (all June) and Michigan consumer confidence (July) but they won’t move the market needle as the Fed enters its communications blackout period.
The situation in the Middle East and general risk sentiment take center stage in the run-up to central bank gatherings (starting with ECB next week). Relentless military strikes between the US and Iran slowed Hormuz traffic to a trickle and pushed energy prices up. Brent crude spiked lower this morning on headlines that China and Pakistan called on the US and Iran to cease fire and resume talks. The move didn’t last though as it was followed by more (intercepted) Iranian strikes directed at Jordan and Oman. Risk of escalation remains high with the axis of resistance threatening to shut down Bab al-Mandab if the US hits Iranian energy installations. US stock markets look somewhat more vulnerable with especially momentum stocks in the defensive. The Nasdaq yesterday lost 1.5%. Risk aversion spreads to Asia this morning with the likes of China, Taiwan and Japan ceding 3% to 6%. South Korean bourses are closed. The US dollar is again better bid after EUR/USD bumped into first minor technical resistance earlier this week at 1.1473/1.15.
News & Views
The IMF in its latest annual so-called Article IV report warned the UK and the incoming prime minister Burnham about the dire budgetary situation and stressed the need to deliver on the promised fiscal tightening. “[…] the authorities should be very selective in accommodating new demands and reprioritise, while sticking to the deficit reduction plan.” Burnham in recent weeks had signaled the cost of living for households to be one of his early priorities and signaled “some room” for movement on tax. But the IMF said the UK should focus on reallocating resources across departments instead of increasing total spending. Short term measures such as ending VAT exemptions or raising tax on capital gains can help fill the current hole. But with taxes already set to climb to a historic high, the UK in the longer-term needs to address the spending side of the question. Burnham is set to take over as prime minister early next week.
The European Commission will release an overhaul to the banking rulebook today. Among the changes are proposals that deal with the “output floor”, which sets a limit on how far banks can use their internal models to reduce capital requirements. The draft also includes measures to address what the EC calls “excessive” sovereign exposure, along with incentives to encourage diversity in those bond portfolios. What is lacking in the overhaul, though, is a substantial change to the actual capital requirement, which some in the industry say is so high that it gives them a competitive disadvantage compared to peers including in the US.
 figures didn't resonate in Fed rhetoric. Dallas Fed President Logan (2026 FOMC voter) called for modestly higher interest rates as inflation "does not appear to be on track all the way back to 2%" while upside risks remain. Kansas City Fed Schmid thinks it is premature to put too much weight on one data point in an echo of Fed Chair Warsh's suggestion earlier this week that it isn't mission accomplished.){kind=link}