Exports surged in the first quarter of 2025 as American businesses front-loaded imports ahead of the implementation of the tariffs, before falling thereafter. Now that the new trade regime is stabilising, we expect data to be more informative. Sentiment data points to a modest improvement, as the August PMIs beat expectations. Modest growth and inflation near target probably means stable monetary policy.
Now that the Fed appears to be turning dovish, the shrinkage in the interest differentials across the Atlantic should be supportive of further modest euro upside. Economic news out of the common bloc is limited this week, but investors will be keeping an eye on Thursday’s latest ECB meeting accounts.
The possibility of further Bank of England easing in 2025 faded further last week, as July inflation data surprised again to the upside and the PMIs of business activity showed hints of a reacceleration. The price data must have been particularly unwelcome news, as the upward trend is now undeniable, and sticky services inflation is rising at a 5% rate.
While sentiment data such as the PMIs have improved, harder data continues to paint a stagflationary picture, with inflation stuck significantly above the central bank target and the jobs market continuing to deteriorate. We think that the MPC will have no choice but to prioritise the former, and we are not currently expecting any more cuts in the base rate at all during the rest of 2025.
The yen held its own against the dollar last week after data on business activity and inflation came in slightly stronger than anticipated. Bank of Japan governor Ueda also struck a hawkish note during his speech over the weekend, as he warned that a tightening in Japan’s jobs market would push up wages. This week looks likely to be a relatively quiet one in Japan, until Friday, when we’ll see the release of a handful of macroeconomic data reports, including July industrial production and the August Tokyo inflation numbers. Any upside surprises here would further raise bets in favour of additional Bank of Japan hikes - swaps now see around a 70% chance of a 25bp rate increase by the end of the year.
