US inflation data the focus today
Markets largely treaded water yesterday ahead of today’s key CPI inflation report in the US. The dollar has drifted a little higher against both the euro and sterling to trade at around $1.1620 and $1.3450 respectively this morning, while EURGBP is a touch weaker hovering just below £0.8650. Labour market data released a short while ago in the UK were broadly in line with expectations and haven’t impacted the pound to any great extent so far.
Equity markets kicked off the week on a slightly soft note, following last week’s very solid gains, with European and US stocks both shedding a bit less than 0.5%. Asian markets were generally in the black overnight though, and European indices have opened in positive territory this morning, with the announcement of a further 90-day extension to the China-US tariff truce helping sentiment. In government bond markets, UK yields fell by 4-5bps, reversing some of the Bank of England-induced increase at the end of last week, while German and US yields ended broadly flat on the day.
The labour market data published in the UK this morning continues to paint a conflicting (and confusing) picture regarding the employment situation. According to the Labour Force Survey, employment rose quite strongly in Q2, both on the quarter and on the year, but separate HMRC data shows the number of payrolled employees fell steadily through the second quarter and declined further in July. The Bank of England (BoE), for its part, believes the truth is somewhere in between, assessing employment growth in the economy currently to be broadly flat. Meanwhile, the unemployment rate nudged up for a fourth calendar quarter in a row, though at 4.7% in Q2 it was unchanged from the March-May period. On the pay front, whole-economy regular weekly earnings increased by 5% y-o-y in Q2, the same as in March-May, while private sector earnings growth – which the BoE monitors closely – dipped to 4.8% (from 4.9%) and in June was running at 4.5%, the lowest single-month reading since the end of 2021.
Today’s CPI data for July in the US is expected to show the impact of increased tariffs continuing to pass through gradually into consumer prices. The headline and core rates of inflation are both forecast to have nudged up last month, to 2.8% and 3% respectively from 2.7% and 2.9% in June. Other data due today include the small business optimism index in the US and the ZEW index of investor sentiment in Germany.