US July inflation numbers lead today’s agenda

Markets

US July inflation numbers lead today’s agenda. Consensus expects headline CPI to rise by 0.2% M/M with annual figure ticking up from 2.7% to 2.8%. Core CPI is estimated to accelerate to 0.3% M/M and 3% Y/Y (from 2.9%). It’s the second of three Summer inflation reports which Fed Chair Powell suggested would be indicative on the impact of US President Trump’s trade policy and which could impact the US central bank’s reaction function when it meets next in September. The more so given the dramatic downward revisions in the July payrolls report which prompted calls for action by more Fed governors than the two dissenters (Waller & Bowman) at the July FOMC meeting. Avoiding any upward surprises will strengthen current market believe/positioning that the Fed will resume its easing cycle in September as downside employment risks start outweighing upward inflation risks. In case of more benign inflation numbers (or weaker activity/labour market data later this month), we’d even err on the side of markets contemplating the possibility of a 50 bps rather than a 25 bps rate cut at the September meeting. This could extend the steepening move of the US yield curve via an outperformance of the front end and keeps the US dollar in the defensive. August German ZEW investor sentiment will also be released today but isn’t expected to impact trading.

Asian markets trade slightly positive this morning after US President Trump as expected extended the pause of tariffs on Chinese goods for another 90 days to November 10. China put out a similar statement. Japanese stock markets outperform with a new record high for the Nikkei as the nation returns from a holiday. UK labour market data were better than expected with employment rising by 238k 3M/3M in June (vs 185k expected) and July payrolls falling by 8k instead of the feared 20k. The unemployment rate stabilized at 4.7% with wage growth slowing from 5% to 4.6% in June. The data confirm the mood since last week’s BoE meeting that the UK central bank won’t accelerate its quarterly cutting pace (ie skip in September, next rate cut in November). EUR/GBP dips in a first reaction from 0.8650 to 0.8640.

News and views

The Reserve Bank of Australia this morning lowered its key policy rate by 25 bps to 3.6%, bringing this year/cycle’s cumulative easing efforts to 75 bps. Australian inflation has continued to moderate with updated staff forecasts suggesting that underlying inflation will continue to hover around the midpoint of the 2-3% target range assuming an extension of the current gradual easing path. The RBA judges that there’s still a risk of households and firms delaying expenditure pending greater clarity on the outlook, even though the worst (trade) outcomes are avoided. Domestic GDP growth is expected to pick up, be it at a slower pace than projected in May (1.7%-2.1% for 2025-2026 from 2.1%-2.2%). Forecasts still assume the narrative to weigh on both activity and inflation. Domestic labour market conditions remain a little tight, although have eased further in recent months. The Board remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and potential supply, and will do what it considers necessary to achieve its dual mandate of price stability and maximum employment. Australian money markets assume two more rate cuts (quarterly pace), bringing the policy rate to 3.1% by February 2026. The market reaction is negligible as the rate was fully discounted and given limited changes to the RBA statement.

UK same store retail sales rose by 1.8% Y/Y in July, down from 2.7% in June. Food sales increased by 3.2% Y/Y on a like-for-like basis, supported by warm weather and a busy sporting calendar though higher spending was driven more by food inflation than by stronger demand. The head of the British Retail Consortium also added that early month momentum slowed throughout July. Non-food sales rose by 0.7% Y/Y with fashion initially performing well before weather conditions worsened. BRC CEO Dickinson warned that many retailers will face tough decisions over stores and jobs if the upcoming Autumn Budget adds further taxes. Current growth rates of sales barely touch the sides of covering the £7bn in new costs imposed on retailers in last year’s Budget. The ongoing pressure can continue pushing UK prices higher.

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