Летучие мыши и тритоны

By Jane Foley, senior FX strategist at Rabobank

It has been a while since the details of the US CPI inflation report was poured over so much. On initial inspection the slightly softer than expected increase in core CPI inflation at 0.2% m/m (compared with a median expectation of 0.3% m/m) had calmed fears regarding the impact of President Trump’s tariffs on US price pressures. US stock futures rose while treasury yields, and the USD edged lower on what appeared on first sight to be a tame inflation report. Not everyone was relaxed, however, and as the detail was examined the market changed its tune. The breakdown showed that prices of household furnishings and supplies was up a hefty 1% m/m, while prices of video and audio products surged 1.1%. Additionally toy prices jumped 1.8% m/m with apparel rising 0.4% m/m. All four categories are flagged as being tariff sensitive and market hawks will remain nervous that further inflationary pressures could yet appear as tariffed inventory continues to pass through the supply chain to the consumer. Through the remainder of the session, stock markets were dragged lower as the market priced out some Fed easing for this year, yields moved down and EUR/USD dipped its toe briefly below the 1.16 level for the first time since the end of last month. That said, economists have differing views as to whether these pressures will prove to be transient. Our view, and that of the consensus, remains that the Fed will continue to sit tight at the July 30 FOMC meeting awaiting more clarity on the outlook for price pressures. That said, market hopes for a rate cut in September slipped yesterday as the breakdown of the inflation report was absorbed.

It is not just what the Fed might do next that is drawing market attention. Speculation as to whether Fed Chair Powell will remain part of the FOMC until the end of his term is also in view. Powell’s position as Chair expires next May, though his seat on the Board of Governors runs until January 2028. Yesterday Treasury Secretary Bessent confirmed that a “formal process” is already starting to identify a potential successor.

Up until yesterday’s pullback, investors have this month been accused of displaying ambivalent attitudes to the many uncertainties that are still connected to US tariffs. The firmer than expected tone of Germany’s ZEW survey highlighted that investor optimism has been a theme on both sides of the Atlantic. The ZEW expectations index rose to 52.7 from 47.5 the previous month with ZEW President Wamback pointing to hopes for a resolution in the EU-US tariff dispute, along with the impact stemming from the German government’s planned investment programme. Market sentiment suggests that President Trump’s weekend threat of a 30% tariff on the EU is generally being viewed as a negotiation tactic. Yesterday Trump announced a trade deal with Indonesia and indicated that tariffs on pharmaceuticals could come as soon as the end of the month. The FT is reporting this morning that in Q2 US revenues from customs duties hit a record high of USD64 bln, which is USD47 bln more than in Q1. The inference being that tariffs are raising revenue. No new news has been forthcoming with respect to trade agreements with the EU or Japan.

JGB yields continue to draw attention. Today, JGB yields have pulled back from yesterday’s sell-off, though they remain elevated. Fears that seat loses for the ruling LDP party at the July 20 Upper House election have raised the risk that PM Ishiba could resign and be replaced by a less fiscally hawkish leader. Speculation regarding more fiscal spending and relative high inflation pressures in Japan have undermined the country’s bond market.

In geopolitics, President Trump indicated that he won’t give long range missiles that can hit Moscow to Ukraine. The previous day Trump had threatened increased sanctions on Russia and tariffs on its trading partners in addition to more weapons for Kyiv if President Putin did not act within 50 days to end the war in Ukraine.

In Israel, the government is on the brink of collapse after an ultra-Orthodox party quit the coalition over the long running dispute over a new military conscription bill.

At last night’s Mansion House speech, UK Chancellor Reeves pledged to push back against the re-regulation of the City that took place after the GFC. She stated that the “same flawed judgements that has seen newts and bats block major infrastructure projects is the one that requires almost 140,000 finance professionals to certify they are fit for the roles on an annual basis”.