UK GDP Stalls

CURRENCY FUTURES

The USD index is higher, reclaiming some ground after falling on Thursday following a surge in jobless claims and a CPI inflation print that was tame enough to keep investor expectations cemented on a September interest rate cut from the Fed. Jobless claims posted their highest weekly increase in four years, which was significant enough to overshadow the CPI inflation figures, which showed prices rose at the fastest pace in seven months, although in line with expectations and not the tariff-induced inflation surge markets have been worrying about.  The data did scale back bets of a 50 bp rate cut from the Fed in September and led traders to slightly reduce bets of another rate cut in October. Markets are fully priced in for a rate cut in September and expect a 86% chance of another rate cut in October, down from 92% before the data was released on Thursday.

Euro futures are lower, erasing some gains from Thursday after the European Central Bank left its key interest rate unchanged at 2% in a widely expected moved. Markets see less than a 50% chance of another interest rate reduction from the bank after ECB president Lagarde said that the bank remains in a “good place” and said risks to the economy had become more balanced than before. Updated projections showed eurozone GDP growth of 1.2% in 2025 (up from 0.9% in June), slowing to 1.0% in 2026, with 2027 unchanged at 1.3%. Inflation forecasts were nudged slightly higher, to 2.1% in 2025 (vs. 2.0%), 1.7% in 2026 (vs. 1.6%), and 1.9% in 2027 (vs. 2.0%). Now, the ECB and Fed are in contrasting positions, where the ECB is unlikely to cut rates again in the short-term, while the Fed is expected to cut rates for the first time this year at its meeting next week. Fitch Ratings is expected to give its verdict on French public finances after markets close on Friday after the confidence motion on September 8.

British pound futures are lower after GDP data showed that economic growth in the UK ground to a halt in July. GDP did not grow in July, matching economist expectations and down from June’s 0.4% increase with the lack of growth attributed to a 0.9% decline in industrial production and 1.3% decline in manufacturing. The soft growth is unlikely to spur the Bank of England to cut rates at its meeting next week as the central bank focuses on growing inflation fears. Inflation is forecasted to reach 4% in September, double the bank’s 2% target, leaving any easing in policy off the table. Markets are also worried over the impact of expected tax hikes from Treasury Chief Rachel Reeves in her autumn budget as the country struggles to meet self-imposed fiscal rules, an action that might slow growth. Trade balance figures out of the UK for July showed that the trade deficit increased marginally, at 22.24 billion from 22.16 billion in June.

Japanese yen futures fell lower. US and Japanese governments issued a joint statement on Friday, which reaffirmed that exchange rates should be “market determined” and that excess volatility and disorderly moves in exchange rates were undesirable. Japanese Finance Minister Katsunobu Kato said the statement carried weight given the new US tariff order, though he noted there were no discussions with US Treasury Secretary Scott Bessent on specific currency levels. The statement is significant for Japan as it reaffirmed previous agreements and signaled that the US would be making no new demands. On the data front, industrial production in Japan shrank less than expected, contracted 1.2% in July vs. expectations of 1.6%. The data comes after the BSI Large Manufacturing conditions index showed that business sentiment improved in the third quarter, supported by a sharp rebound in exports as firms accelerated shipments to the US ahead of newly imposed 15% blanket tariffs. PPI figures also showed that producer prices fell 0.2% in August, below expectations of a 0.1% drop. However, on an annualized basis, PPI inflation rose to 2.7% from a downwardly revised figure of 2.5%, matching expectations. The data will likely do little to increase the prospects of a rate hike from the Bank of Japan. Revised figures showed that GDP grew more than initially measured in the second quarter, with the economy growing 0.5%, a step above the initial 0.3% reading. Private consumption increased 0.4% from the previous quarter, compared with a 0.2% rise in the preliminary reading, while capital expenditure growth was revised to 0.6%, compared with the initial estimate of 1.3%.

Australian dollar futures are lower, although the Aussie is on track for its best week against the greenback since April as US data cemented expectations of a rate cut in September and did little to rein in bets of further cuts from the Fed.  The Aussie has also benefited from record-high stock prices, positive yield differentials as the Reserve Bank of Australia is set to go slowly on its easing cycle, higher commodity prices as well as the country’s political stability and relatively sound debt position. Consumer inflation expectations rose to 4.7% in September from a five-month low of 3.9%, reflecting resilient household demand and stronger private sector growth, though the RBA remains cautious amid domestic and global uncertainties. Money markets are now pricing an 76% chance of a rate cut in November following a run of solid domestic data that has pointed to increasing inflationary pressures. Markets are pricing in no cut from the bank at the RBA’s September meeting.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, giving back some of yesterdays gains after a slate of data led traders to solidify expectations that the Fed will cut interest rates in September. CPI inflation data largely came in line with expectations, showing that consumer prices rose in the month of August. Headline CPI rose 0.4% in August, accelerating from July’s 0.2% gain, with year-over-year inflation ticking up to 2.9%. Shelter was the largest contributor to the monthly increase, while food prices rose 0.5%. Core CPI rose 0.3% for the second consecutive month and 3.1% year-over-year, with strength in airline fares, used vehicles, and lodging. Despite some moderation in medical care and communication, underlying inflation remains sticky, particularly in shelter and services.

PPI inflation data showed a 0.1% decline in final demand prices in August amid a drop in trade services margins and a mild increase in the cost of goods. A 0.2% drop in the prices of services accounted for the fall in the PPI. That followed a 0.7% rebound in July. Services were last month held down by a 1.7% decline in margins for trade services, reflecting a 3.9% decrease in margins for machinery and vehicle wholesaling. The long of strong price pressures could potentially signal a softening demand picture against the backdrop of a weakening labor market.

Thursday’s 30-year bond was met with solid demand, despite lingering concerns in the market over US fiscal health and widening debt levels. Indirect bidders took an above average take at 68% of the issue compared to a six auction average of 63.4%. Direct bidders took an above average of 28% compared to the six-auction average of 23.2%, while dealers were awarded 10% vs. an average 13.4%. The auction rounds out a week of solid debt auctions from the Treasury, Wednesday’s billion auction of reopened 10-year note and Tuesday’s three-year note auctions were also met with solid demand and aggressive bidding.

The spread between the two- and 10-year yields rose slightly to 50.5 bps from 50.3 bps on Thursday.

STOCK INDEX FUTURES

Stock index futures are mixed in relatively quiet trade with no major data slated for release today apart from Michigan consumer sentiment and inflation expectation figures due later this morning. All three major indexes rallied on Thursday, each setting all-time highs while the Dow crossed the 46,000 level for the first time. The indexes have rallied this week on a slate of economic data that has cemented expectations for a rate cut from the Fed in September and heavily added to expectations of interest rate reductions again in October and December. CPI inflation data out on Thursday showed that consumer prices rose 0.4% on the month in August, while core prices rose 0.3% on the month, both figures coming in line with expectations. Jobless claims shot higher with 263,000 new claims for the week ending September 6, well above expectations of 235,000 and posting the highest figure so far this year.

Despite the CPI data reflecting inflationary pressures, markets took the relatively tame reading as a sign that inflation is not surging as much as initially feared due to tariffs, and that the Fed should be more concerned with the labor market. PPI inflation came in well below expectations, falling 0.1% in August, adding further cause for markets to expect a series of interest rates cuts from the Fed this year. For now, the three major stock indexes are all headed for weekly gains of around 1.6%.

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