In this episode:
- US Outlook – Tariffs, Growth, and Inflation Risks
- Global Watch – China Data and Australian Rate Cut Prospects
- UK Monetary Policy – Bank of England’s Historic Vote and Miscommunication Risks
US Outlook – Tariffs, Growth, and Inflation Risks
- Trump 2.0 tariffs now in effect could provide significant fiscal income if used for debt reduction, but growth impacts are complex.
- Tariffs likely to cause a domestic price shock and external demand shock, adding headwinds for consumers and global trade.
- Upcoming US data (CPI, PPI, retail sales) will be closely watched as high-frequency indicators face heightened scrutiny.
Global Watch – China Data and Australian Rate Cut Prospects
- China’s July CPI/PPI and broader economic data will be key to assessing stimulus effectiveness and consumer demand.
- In Australia, softer inflation could prompt a 25bp rate cut, though a resilient labour market may temper dovish guidance.
- Northern hemisphere summer lull in data, but China and Australia stand out as focal points for market attention.
UK Monetary Policy – Bank of England’s Historic Vote and Miscommunication Risks
- The BoE’s unprecedented two-stage vote resulted in a narrow 5-4 decision to cut 25bp, signalling a more balanced stance than markets expected.
- Price rises from administered costs and energy slowed the pace of cuts, but falling demand and fiscal tightening point to further easing.
- Potential for a 50bp cut in November is high as fiscal pressures and weaker activity challenge the BoE’s gradualist approach.
Transcript (AI Generated)
Matt Jones
Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.
My name is Matt, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. It's great to have you here with us again.
Neil Staines
Thank you very much Matt. It's great to be here.
Matt Jones
So the US continues to dominate the headlines from geopolitics to relative inflation and growth dynamics. How are we thinking about the US at the moment, and what are we looking for next week?
Neil Staines
Yeah, that's a great question. Thanks, Matt. There's not an obvious place to start — Trump 2.0 tariffs, after several pauses and delays, are now finally in place. The income to the US over the coming years is potentially very significant.
If this is used to pay down debt, then this has very significant connotations for the fiscal trajectory and US term premium alike. More complex, however, is the impact on the US and global growth. It is clear that there will be a price shock inside the US and an export or demand shock outside of the US, against a backdrop of a slowing US economy. We touch on the very significant non-farm payroll down revision in this week's blog. The impact becomes a lot more complex — increases in prices dampen the monetary reaction function of the Fed, much to the chagrin of the President, and the combination of increased prices and higher or less lower interest rates is likely a further headwind for the consumer.
Externally, the tariff shock could well be multiplied by the softening US demand backdrop. This is a non-linear implication for global growth that we believe is not currently priced by the market. Now, we retain a core macro view of slower but still positive US growth and continued disinflation, but the risks — certainly towards global growth — are rising. Next week, we get CPI for July — still not likely inclusive of the full tariff impact — but markets will be watching this very closely. We get PPI also for July, to complete the Fed's preferred inflation measure of PCE in terms of its component parts, and retail sales, another gauge of consumer demand temperature. Either way we look at it, next week and going forward, the US high-frequency macroeconomic data is now under more acute scrutiny.
Matt Jones
Now, with this more complex outlook for the global economy, what are we watching for more globally next week?
Neil Staines
Yeah, indeed. It is a relatively light data calendar next week, at least in the northern hemisphere summer holidays, but there are some important focal points we're watching out for. Starting with China, we get CPI and PPI release over the weekend. Markets will comb the data for signs of any pickup in consumer demand therein — stimulus measures and infrastructure projects have yet to show material signs of improvement in this regard — but the CPI/PPI print for July and the release of the data suite — retail sales, industrial production, fixed asset investment, and unemployment rate — that we get also for July on Friday will be a key barometer therein.
In Australia, after an unexpected pause in July, this time out further signs of disinflation likely lead to that 25 basis point cut on Tuesday of next week to 3.6%, but a tighter labour market and some signs of production resilience mean the language may be more balanced and that forward guidance may be a little more guarded.
Matt Jones
Speaking of more balanced monetary policy language, it was an historic vote from the Bank of England this week. What are we taking from the MPR, and what are we watching for next week from a data perspective?
Neil Staines
Yeah, absolutely. Thanks, Matt. It was an historic two-vote process to reach a decision to cut 25 basis points this week by the Bank of England's Monetary Policy Committee.
The initial vote came in at 1–4–4 — that's one vote for a 50 basis point cut, four for 25, and four for unchanged. Theoretically, a tie between two voted outcomes, the Governor chose not to use his deciding vote mandate but instead to hold a second vote with only two choices: cut 25 or unchanged.
Hence, we got a 5–4 vote — notably, much more balanced than the market had anticipated. Now, we discussed this further in this week's blog, but ultimately we see this as a miscommunication by the Bank of England — one which has material implications for the Chancellor. Now, Governor Bailey outlined the fact that he still sees policy as restrictive and that the direction of rates remains down, yet the path, in a gradual and careful manner, has become more complex.
The issue essentially is twofold. Firstly, the direct impact of increased prices — now those price increases predominantly come from administered prices, water autoregulation changes, minimum wage rises that filter through into the numbers, and also energy price rises. But this increase in prices gave the dissenters more caution about cutting rates whilst revising inflation projections higher. The second factor is the indirect impact of the falling demand driving inflation lower, and that's really the side of the argument that we fall on at the moment, with falling demand and activity in the UK our biggest concern.
As we have outlined over many months, it is also the fiscal deterioration that plays a huge part here — not least the recently well-publicised OBR calculation of a 50 billion pound black hole in the finances. This means fiscal tightening in the coming Budget is likely inevitable. The negative demand impulse that this causes means that monetary policy must ultimately take up the slack. Therefore, despite no debate about the fiscal trajectory at this week's meeting — perhaps retrospectively viewed as another miscommunication — we see the prospect of a 50 basis point cut in November as high and rising.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next time.
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