CPI Hits the Stage

US

USD (DXY index) is consolidating near a three-week high and US stocks are poised to notch fresh highs. The US June CPI report takes the spotlight today (1:30pm London). Headline is expected at 2.6% y/y vs. 2.4% in May and core is expected at 2.9% y/y vs. 2.8% in May. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.6% y/y and 3.0% y/y, respectively. So far, the effect of tariffs on inflation has been muted but the rising ISM prices index point to upside risk.

We are sticking to the view that higher US levies is a downside risk to US growth and upside risk to inflation. As of July 14, the overall US average effective tariff rate (including the announced 30% tariffs on the EU and Mexico) is estimated at 20.6%, the highest since 1910 and up from 2.4% in January. The 2025 tariff is anticipated to raise consumer prices by 2.1% in the short-run and reduce real GDP growth by -0.9pp this year.

According to the Washington Post, White House National Economic Council Director Kevin Hassett is emerging as a leading contender to become the next Fed chair. Hassett supports President Donald Trump’s push for lower rates and risk being seen by the markets as lacking policy autonomy.

Nevertheless, the Fed chair is not an autocrat. Monetary policy is set by the FOMC (7 governors and 5 Reserve Bank presidents) which constrains the power of any one individual in setting policy. Each member has one vote, and all decisions are made by majority vote. Fed speakers today: Bowman, Barr, Barkin and Collins.

Bottom line: loss of confidence in US trade policy and political interference with the Fed’s independence spell trouble for the dollar.

EUROZONE

EUR/USD recovered slightly to 1.1688 after testing support near 1.1660. Germany’s ZEW economic sentiment index is up next (10:00am London). The Expectations index is projected to improve to 50.2 in vs. 47.5 in June, reinforcing the case that the ECB’s rate-cutting phase is close to wrapping-up. EUR/USD has room to resume its year-to-date uptrend, with 1.2000 back in focus.

UK

EUR/GBP is edging higher, eyeing a test of key resistance at 0.8700. UK June same-store retail sales picked-up 2.7% y/y vs. 0.6% in May helped by warm weather. Regardless, stalling labor market and the likelihood of higher taxes later this year suggest household spending growth will remain subdued.

Bank of England (BOE) Governor Andrew Bailey gives his annual speech at the financial and professional services dinner at Mansion House later today (9:00pm London). Bailey has stuck to the BOE’s well-honed policy-guidance for “a gradual and careful approach” to further rate cuts. However, the sluggish UK economic outlook has raised the risk he tilts more dovish. EUR/GBP has room to grind up to 0.8800.

CANADA

CAD will take its cue from Canada’s June CPI print (1:30pm London). Headline CPI is expected at 1.9% y/y vs. 1.7% in May while core CPI (average of trim and median CPI) is seen at 3.0% y/y vs. 3.0% in May. The Bank of Canada (BOC) is in no rush to resume easing given that Canada underlying inflation is sticky well above its 2% target and the June labor force survey was very strong.

The swaps market is pricing in 18% odds of a 25bps cut at the next July 30 meeting and just one full 25bps cut over the next 12 months that would see the policy rate bottom at 2.50%. Bottom line: the BOC is near the end of its easing cycle, which is supportive of CAD.

AUSTRALIA

AUD/USD is range bound around 0.6550. In July, the Westpac-Melbourne Institute Consumer Sentiment Index rose 0.6% m/m to a four-month high at 93.1. However, consumers are less confident about jobs as the Unemployment Expectations Index rose 1.1% to a nine-month high at 128.75.

At its last July 8 meeting, the RBA unexpectedly left the cash rate target unchanged at 3.85% in part because “various indicators suggest that labour market conditions remain tight.” Australiwcrsa’s June labor force report, due Thursday, will offer a timely update of the jobs market ahead of the next RBA meeting on August 12. RBA cash rate futures virtually fully price-in a 25bps cut in August.

JAPAN

USD/JPY is treading water just shy of the June 23 high at 148.00. Long-term Japan government bond yields are soaring again in part because of concerns over fiscal expansion ahead of Japan’s July 20 Upper House elections. Rising JGB yields is pushing up Japan’s debt servicing costs, limiting the BOJ tightening capacity and posing a headwind for JPY. The swaps market is pricing-in about 50% odds of a 25bps rate hike by year-end and a total of 50bps of tightening to 1.00% over the next two years.

CHINA

USD/CNH is stable under 7.2000 and China’s CSI 300 stock index is consolidating near a its highest level this year. China real GDP growth rose more than expected by 1.1% q/q (consensus: 0.9%) vs. 1.2% in Q1 to be up 5.2% y/y vs. 5.4% in Q1. This is in line with China’s 2025 growth target of around 5%.

It’s worth pointing out that China’s growth target is a government-set growth goal used as a policy tool to guide economic/social planning rather than a reflection of underlying supply and demand dynamic. As such, the quality and sources of China’s growth is more relevant more investors.

From that perspective, China’s Q2 GDP performance reveals clear divergence. Industry (exports and manufacturing) continues to be the main growth engine, while consumer spending remains weak. In June, industrial output growth overshot expectation at 6.8% y/y (consensus: 5.6%) vs. 5.8% in May and retail sales growth underwhelmed at 4.8% y/y (consensus: 5.3%) vs. 6.4% in May. On a month-on-month basis, retail sales fell -0.16% in June, the first drop since April 2024.

In our view, three major structural constraints prevent any meaningful effort to increase the role consumption plays in China’s economy: low household income levels, high precautionary savings, and high levels of household debt. As such, China will continue to lean heavily on infrastructure to hit its growth target. This is good for commodity prices but bad for China’s long-term economic health.