Weekly house view | We have a deal
The week in review
Tariff and central banks dominated the news during the week, with 15% tariffs becoming the new 10%. On Sunday, US and the EU struck a 15% tariff deal that averts a trans-Atlantic trade war.
The European Central Bank has held focus on the medium term, voting unanimously to maintain the 2% deposit rate. Underlying inflation here is stabilising – the probability of a 0.25% cut in September has dropped from 48% to 20%. ECB President Lagarde hasn’t ruled out hikes if trade uncertainty clears.
Earlier in the week, in another welcome surprise, the US struck a deal with Japan, cutting tariffs to 15% from 25% and Japan committed to a USD500 billion investment fund for the US. For Japan, the tariff deal has raised the chances of an October rate hike (probability jumped to 65% from 35%). The central bank meets next week. Ishiba, clinging to the premiership, needs to focus on fiscal stimulus if he wants to keep his post.
Despite pressure from Trump, Federal Reserve Chair Jerome Powell looks likely to emphasise patience on rate cuts and keep the policy rate at 4.25–4.5%. Members Waller and Boman favour cuts and could dissent.
Quote of the week
Trump advises Europe: “Stop the windmills, and also, I mean, there's a couple of things I could say, but on immigration, you'd better get your act together or you're not going to have Europe anymore.”
Key data
A strong Q3 entry for the Eurozone could cushion tariff headwinds, supported by the July flash PMI. The eurozone’s composite PMI rose to 51.0 (from 50.6 in June), above expectations (50.7), marking 11th month of expansion. US manufacturing and the services Purchasing Managers Index went in opposite directions in July, with the former contracting and the latter rebounding sharply, suggesting the economy is likely to slow. Price pressures were mostly stable, while two thirds of manufacturers reported higher input costs (attributed to tariffs), and tariffs were explicitly mentioned by 40% of the service providers reporting higher selling prices.