Michael Brown

DIGEST – Markets were choppy on Wednesday amid Trump’s renewed threats to fire Fed Chair Powell, while UK inflation figures painted a grim economic picture. Today, a busy US data docket awaits.

WHERE WE STAND – I may as well get the bad news out of the way first this morning, and crack on with discussing the UK economy.

Yesterday’s inflation figures were, frankly, grim. Headline prices rose 3.6% YoY last month, not only above the MPC’s forecast, but also the fastest pace since January 2024. Measures of underlying inflation also painted a pretty dismal picture, with core prices rising 3.7% YoY, and services inflation rising by 4.7% YoY. All of these, clearly, not only well above the BoE’s inflation aim, but also moving in the wrong direction.

The data shouldn’t deter the Bank of England from delivering a 25bp cut at the start of August, though it does put the kibosh on the idea that they would ditch their ‘gradual and careful’ policy guidance, and make a dovish turn as focus turns to supporting the labour market. Instead, my base case is now that just two 25bp cuts will be delivered over the remainder of the year, probably in August and November.

The inflation figures add to what remains a grim UK backdrop – unemployment heading higher; payrolls having fallen for 7 months in a row; GDP having contracted for 2 months running; PMIs pointing to continued weakness in the months ahead; a rapidly widening budget deficit; and, retail sales having fallen off a cliff.

Amid all that, the BoE can’t cut aggressively with inflation still far too high, while the Treasury remain pre-occupied with spending cuts and tax hikes in an effort to fix the UK’s fiscal woes. The net result – tight(ish) monetary policy, and tighter fiscal policy, which will both serve to worsen the ongoing economic slowdown, and leave UK Plc stuck in its present doom loop. I really struggle to see a way that all this resolves itself, without a proper tantrum kicking-off at the long-end of the Gilt curve.

Anyway, onto other matters, where I suppose I should cover the whole ‘will he, won’t he’ saga when it comes to President Trump firing Fed Chair Powell. Despite there being no legal precedent allowing him to do so, Trump was apparently brandishing a letter noting Powell’s dismissal in front of GOP lawmakers yesterday, before denying that any such letter, or plan, had even taken place.

The market reaction to the mere rumour of Powell’s ouster was very much as expected – a much steeper Treasury curve, a dump in the dollar, and some selling of equities. Quite obviously, Trump would be ill-advised to go down the path of actually tinning J-Pow, given that the market fallout would be many magnitudes larger than that seen yesterday.

When one has to reach for Turkey as an analogy for how monetary policy is being set, it isn’t exactly a promising, or reassuring, sign. And, in any case, yesterday’s reaction supports my longer-running bearish view, selling rallies in the greenback as any and all pretence of monetary policy independence continues to be eroded, in rather rapid fashion.

LOOK AHEAD – A few bits and bobs of note on the calendar today, with the latest US retail sales report the highlight.

Headline sales are set to have risen by 0.1% MoM in June, rebounding from the 0.9% MoM decline notched in May, while the all-important control group metric, which feeds into the GDP basket, is seen rising 0.3% MoM, after an 0.4% MoM increase last time out. Also from the US today, we get the latest Philly Fed manufacturing survey, plus the weekly jobless claims report, where the initial claims print coincides with the survey week for the July jobs report.

Elsewhere, this morning brings the latest UK labour market report, which is set to show unemployment having held at 4.6% in the three months to May, as earnings pressures continue to fade. Payrolls, meanwhile, in June, are seen declining for the eighth straight month.

Also out today is the final read on June eurozone inflation, which should remain unrevised at 2.0% YoY, while a bunch of Fed and ECB speakers also pad out the docket. Finally, notable earnings today come from the likes of Pepsico and Netflix, with options tied to the latter pricing a move of +/-6.5% in post-market trade.

Brown is a Senior Research Strategist at Pepperstone