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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
With dovish signals coming from Federal Reserve chair Jay Powell and concerns about the impact of US President Donald Trump’s tariffs on inflation, markets will be paying particularly close attention to the July personal consumption expenditures report on Friday.
The lagging index is the Fed’s favoured measure for inflation, although markets usually focus on the consumer price index.
June’s PCE inflation, out last month, came in above economists’ expectations, at 2.6 per cent, above May’s 2.4 per cent rate, while core PCE came in at 2.8 per cent, up slightly from May. The June numbers showed some of the strongest signs of tariff-related price increases — particularly in import-heavy goods categories such as furniture and appliances — and a broader pick-up in inflation, echoing the June CPI data.
But the most recent CPI report, which came out earlier this month, showed some of those pressures abating. July’s CPI was still elevated and had traces of tariff inflation, but the pressure from them was lower than in June, and lower than many analysts had feared.
PCE is expected to be similarly tame. Economists are anticipating 2.6 per cent for the headline number, or flat from June, and a slight uptick to 2.9 per cent for core PCE. That slight pick-up is due to higher expected services inflation, according to Omair Sharif at Inflation Insights.
But if PCE, particularly goods prices, comes in above expectations, that could put the Fed in a tight spot. Markets are expecting a cut in September, and investors grew more confident that they will get one after Powell’s speech at Jackson Hole on Friday. But if PCE and the August CPI show that inflation is still sticky and rising faster, those hopes could fade. Aiden Reiter
Is Germany flirting with yet another recession?
After the sharp downward revision of Germany’s GDP data on Friday, analysts and traders will take an especially close look on Monday morning at the Ifo business climate survey for August to assess how badly Europe’s largest economy is performing.
In the second quarter, GDP contracted 0.3 per cent rather than the 0.1 per cent contraction previously estimated, as companies’ investment, construction activity and exports all declined. Germany’s economy is still in a rut, with GDP declining in six of the past 10 quarters.
August is unlikely to have been a turning point. Analysts polled by Reuters forecast the first decline in Ifo’s closely watched survey since December, to 88.3 points in August from 88.6 in July. Both current conditions and expectations are thought to have taken a hit.
The results will be the first to reflect any potential impact on confidence from the trade deal that the EU struck with the US in late July, which ushers in 15 per cent tariffs on most imports from Europe.
While optimists hope that the agreement will have cleared some of the uncertainty clouding the outlook, pessimists point out that the US import duties are higher than previously anticipated and may hurt European exporters badly. Olaf Storbeck
Will long-term borrowing costs keep rising in the UK?
UK government debt has come under more pressure this month, as worries persist about the sustainability of the country’s debt pile, while this week’s inflation data highlighted a persistent rise in consumer prices.
This has led investors to move out of long-term UK government bonds, sending prices lower and yields higher.
The 30-year gilt yield is on track for its biggest monthly rise since March, having climbed 0.16 percentage points since the beginning of August to about 5.54 per cent. At the beginning of this week, the yield on the 30-year inflation-linked bond reached its highest level since 1998, surpassing even its heights following the infamous 2022 “mini” Budget.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said the future trajectory of long-dated gilts would depend on the policy response from all three of the UK Debt Management Office, the Bank of England and the government.
“The long end will stabilise if the DMO stops issuing long-[dated bonds], the Bank of England stops selling long[-dated bonds] through quantitative tightening, and the government can adhere to a fiscally responsible position which includes tackling spending,” Dowding said. Without all that, “the pressure will persist”.
Higher debt servicing costs are further squeezing Chancellor Rachel Reeves’ “fiscal headroom”. Rising yields “add to the black hole in Reeves’ finances for the Budget, making the challenge facing her ever more difficult to accomplish”, said Dowding. “There is a slow-moving fiscal accident in motion.” Emily Herbert
