Written Commentary
Persian Gulf, Red Sea and Russia/Ukraine still the overarching reality, digesting UK inflation, Japan trade and Indonesia rate hold; tech sector earnings reports the focal point for the rest of the day given light calendar of data and events.
- U.K.: June CPI relief no more than transient, as petrol and household energy prices to drive July inflation higher; Burnham govt measures to ease cost of living pressures show good intent, but also hefty fiscal constraints.
- Japan: record imports paced by high energy prices, adding to pressure on BoJ to pick up pace of rate hikes and Fin Min to walk the walk on FX intervention.
EVENTS PREVIEW
Another light day for economic data has UK inflation, Japan trade data and a no change Bank Indonesia rate decision to digest and little else, with the focus likely to be on a heavyweight earnings schedule that has Alphabet, IBM, Tesla and Texas Instruments amongst its highlights, outside of course of the overarching news flow from the Persian Gulf, Red Sea and Ukraine/Russia.
The weekly EIA report on US oil sector inventories, and the USDA’s Global Coffee report top the agenda in the commodity space. While scheduled news flow will be sparse, the broader picture is one of a cacophony of inputs, most of which lean towards the negative side in terms of either being major risk events or imparting major headwinds for the global economy.
Japan Finance Minister Katayama is again talking up intervention on the JPY as USD/JPY 163.00 comes under pressure, while ‘sources’ are suggesting that the BoJ may consider a faster pace of rate hikes – in both cases, the risk of ‘crying wolf’ continues to rise. The JPY is definitely undervalued, but with PM Takaichi still playing relatively fast and loose with fiscal policy, Japan’s trade data posting a record high level of imports due to energy prices and a chronic energy import dependency, and the BoJ still well behind the curve on rate hikes, the risk of a larger upside breakout and/or a sharp rise in volatility remains high.
As markets await the first barrage of tech sector results, tensions between the US and EU on digital services taxes continue to rise, while the EU appears to have few ideas other than tariffs to combat the rise in imports from China, which on the one hand testify to China’s overcapacity in many manufacturing sectors, but more importantly underscores how high energy and labour costs, and a poor productivity trend underline a rapid loss of competitiveness. Energy sector inventories continue to decline, above all refined products and petrochemicals thanks to Persian Gulf supply disruptions, while the agricultural sector faces weather and war related disruptions.
Meanwhile, the earnings season will bring the usual bouts to likely sharp individual stock volatility due to hyperscaler and chipmaker results, as the debate around the costs and the very uncertain potential returns on AI-related investment heats up.
** U.K. – June CPI **
The marginally lower than expected drop in CPI (0.1% m/m, 2.6% y/y) was paced primarily by falling petrol prices, a more modest dip in food and apparel, slightly offset by rises in recreation/culture and restaurants/hotels, the latter limiting the Services CPI drop to 3.6% y/y against a forecast of 3.5%. This reprieve will, however, be temporary as the rise in the household energy price cap and a sharp rebound in petrol prices is set to drive July CPI higher.
The new Burnham government’s moves to cut VAT on household energy and cap bus fares are a statement of good intent, but the relief for household cost of living pressures will be very limited. Meanwhile, the new government has already been forced to walk back on its hint of raising income tax thresholds (which have been frozen for the past 5 years), due to the reality of fiscal constraints, and per se raises considerable doubts about whether it can really deliver on promises of easing cost of living pressures.
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