Markets
The latest U.S. CPI and PPI data for June were relatively modest and did not dominate Fed commentary. Dallas Fed President Esther Logan (a 2026 FOMC voter) advocated for a modestly higher interest rate, noting that inflation “does not appear to be on track back to 2%,” while upside risks remain. Kansas City Fed President Thomas Schmid said it was premature to place too much emphasis on a single data point, echoing Chair Warsh’s earlier warning that progress is not yet assured. Schmid also highlighted rising energy prices. Fed Vice‑Chair Lael Brainard currently views the Fed as well‑positioned, but suggests a reassessment may be warranted if inflation does not ease. Market participants reacted more to the data than to the Fed’s messaging, with July rate‑hike probabilities falling from nearly 50% at week’s start to about 10% now. A 25‑basis‑point move is now fully priced for the December FOMC meeting rather than September.
Geopolitical tensions in the Middle East are dominating risk sentiment ahead of upcoming central bank meetings, starting with the ECB. Persistent U.S. strikes against Iran have throttled Strait of Hormuz traffic and pushed energy prices higher. Brent crude fell early on news that China and Pakistan urged the United States and Iran to cease fire and resume negotiations, but the decline was short‑lived as further Iranian attacks targeted Jordan and Oman. Escalation risk remains high, with the axis of resistance threatening to close Bab al‑Mandab if the United States strikes Iranian energy facilities. U.S. equity markets appear more vulnerable, especially momentum‑driven stocks; the Nasdaq fell 1.5% the previous session. Risk aversion has spread to Asia, with markets in China, Taiwan and Japan slipping 3% to 6% early this morning; South Korean exchanges are closed. The U.S. dollar is once again stronger, following EUR/USD’s breach of the minor technical resistance level around 1.1473‑1.15.
News & Views
The International Monetary Fund, in its latest Article IV review, cautioned the United Kingdom and incoming Prime Minister Burnham about the severe fiscal imbalance and urged adherence to the promised fiscal consolidation. The IMF urged selective accommodation of new demands, re‑prioritisation, and strict compliance with the deficit‑reduction plan. While Burnham has highlighted the cost‑of‑living crisis for households and signalled some flexibility on tax measures, the IMF recommended that the UK focus on reallocating resources across departments rather than increasing overall spending. Short‑term measures such as ending VAT exemptions or raising capital‑gains tax could temporarily fill the gap, but with tax rates already approaching historic highs, long‑term fiscal sustainability will require addressing spending.
The European Commission will publish today an overhaul of its banking rulebook. Key proposals include an “output floor” that limits banks’ use of internal models to reduce capital requirements, measures to curb excessive sovereign exposure, and incentives to promote diversification in bond portfolios. However, the package does not substantially revise the capital requirement itself, which industry participants argue is so high that it places them at a competitive disadvantage relative to peers, especially in the United States.