Germany, Netherlands, Sweden Oppose EU Common Borrowing

Ethereum (D1)

Source: xtb

US consumer sentiment rose to a five-month high in early July as expectations about the economy and inflation continued to improve.

The preliminary July sentiment index rose to 61.8 from 60.7 a month earlier, according to University of Michigan data released Friday. The figure still remains below levels seen throughout last year.

Consumers expect prices to rise at an annual rate of 4.4% over the next year, down from 5% in the prior month and the lowest since February. They saw costs rising at an annual rate of 3.6% over the next five to 10 years, also the lowest in five months.

At the same time, concerns about tariffs continue to limit optimism about the outlook for the economy.

“Consumers’ expectations over business conditions, labor markets, and even their own incomes continue to be weaker than a year ago,” Joanne Hsu, director of the survey, said in a statement.

“That said, the recent two-month lift in sentiment suggests that consumers believe that the risk of the worst-case scenarios they expected in April and May has eased,’’ Hsu said.

Consumers’ views of their current personal finances increased, likely supported by the rally in the stock market. The survey concluded on July 14, more than a week after President Donald Trump signed his budget bill into law, extending tax cuts and new breaks for tipped workers.

Still, Hsu said announcements of higher tariffs or a pickup in inflation would likely restrain sentiment.

The survey showed the current conditions gauge rose to 66.8 from 64.8, while the expectations index edged up to 58.6.

The increase in sentiment was driven by Republicans and political independents.

Source: Bloomberg

Source: finance.yahoo

Inflation has been the big economic concern for several years now, across much of the globe (though not quite all, as we’ll see in a moment). But the tentative, broad view has been that prices are now sort-of, kind-of under control. Certainly enough so that markets largely expect central bank interest rates to keep falling, albeit slowly, over the next year or so.

In the US, President Donald Trump has even gone so far as to put a great deal of pressure on Federal Reserve boss Jerome Powell to cut interest rates, pelting him with insults and even threatening to fire him (which may not even be possible).

The problem, however, is that prices don’t actually seem to be cooperating with the hopes and dreams of politicians and central bankers. In the UK, we’ve seen inflation come in “hotter” than hoped on a regular basis, with this week’s data no exception.

And over in the US, even without much obvious impact from tariffs as yet, inflation is nowhere near “beaten,” as my colleague John Authers pointed out earlier this week.

So progress toward a more “normal” world has been a lot slower than was expected a year ago. And that does rather raise a question. In yesterday’s piece, I pointed out that it’s actually quite tricky for the Bank of England to consider cutting rates aggressively when inflation is barely below Bank rate.

So what if inflation actually stops falling? What if it starts to perk up again?

It’s not out of the question. As Vincent Deluard of global financial services company StoneX Group points out, Powell could be forgiven for leaving US interest rates on hold at the next Fed meeting.

Although US core CPI is rising at an annual rate of 2.7% (as per the June data released last week), US services inflation remains stubbornly high, and there are signs that tariffs may be adding to the cost of durable consumer goods, such as washing machines.

On this latter point, UBS economist Paul Donovan highlights that it might be easier for companies to push the rising cost of infrequently purchased goods onto consumers. It’s one thing to notice the price of milk or petrol going up, but if you last replaced your telly or washing machine five or more years ago, you’ll probably be less sensitive to price changes.

Moreover, as Bloomberg columnist Simon White points out, various leading indicators “point to re-acceleration in inflation in the second half of the year, almost regardless of where tariffs settle.” (Those of you with access to Bloomberg terminals can read his work by subscribing to the MacroScope column, which I’d highly recommend.)

The China Surprise

Pricing pressures stem from factors including rising freight costs, rising industrial metals prices, and also food prices. But there’s another big potential inflationary force, coming from a surprising direction — China.

I say surprising because China has a long history of exporting deflation in the form of cheap goods. On top of that, China is among the few economies that are internally battling deflation.

Indeed, the Chinese government is very keen to put an end to deflation, as this fascinating piece by my Bloomberg Opinion colleague Shuli Ren explains. (One reason this piece in particular caught my eye is because “vicious” private sector competition is not necessarily something one associates with a communist economy.)

This isn’t a simple battle to win. However, as White notes, the pace of money growth in China now does look as though it’s accelerating. China is hugely significant in terms of the global money supply, so this is worth watching. Indeed, the country is so large that “money in China is the single most important driver of global liquidity,” White says.

Why does this matter? Without wanting to get too monetarist about it all, more money should mean more borrowing, more spending, more economic activity and more growth, and in turn, more inflation. Given China’s sheer scale, that means more inflation globally.

Adding it all up, there’s a risk that we’re all being a bit overconfident about the idea that inflation is now behind us as a major issue.

What could put a serious dent in this thesis? A recession is the most obvious outcome that might stifle inflationary pressure. But even then, any slowdown might take on more stagflationary than deflationary characteristics.

Also, despite vast government debts, leaders are under pressure to keep spending — or to at least duck hard choices — in order to appease irritated electorates. Japan is merely the latest economy whose election this weekend has been dominated by anger over the cost of living.

As far as what it all means for your money, all I can suggest is that you stay vigilant, be prepared for more potential bond-market drama, and hold at least some portion of your portfolio in “real” assets, which have a tendency to hold their value in inflationary times. My colleague Merryn had some thoughts on this in her newsletter last week.

Source: Bloomberg Europe

Source: Bloomberg

Federal Reserve Governor Christopher Waller still supports interest rate cuts at the end of July, despite growing concerns over a possible tariff-induced inflation.

At a meeting of the Money Marketeers of New York University, he remarked, “I believe it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now.”

Waller believes tariff-induced inflation is only temporary

According to Waller, the economic and labor market data show that the economy is still growing, though more slowly.

He argued, however, that unemployment risks have risen, warranting a rate reduction. The Fed Reserve Governor believes a weaker job market is “greater and sufficient” to cut interest rates, adding that policymakers should not wait for a deeper decline in the labor market.

He added that they can choose to disregard the short-term impact of tariffs and instead prioritize broader economic concerns.

In his view, more attention should be directed toward underlying inflation, which is dangerously close to the Fed’s 2% goal, rather than temporary tariff-related price pressures. Even before Thursday, Waller had previously insisted that tariff effects would only be temporary.

The Feds are set to meet from July 29 to July 30 in Washington to discuss policies and possible rate cuts. So far, among Fed officials, Waller and Vice Chair for Supervision Michelle Bowman are the only two to express a willingness to consider rate reductions as early as this month.

Other officials like Governor Adriana Kugler and New York Fed President John Williams, however, over tariff fears, have suggested that policymakers should wait longer before slashing rates.

Investors anticipate that rate cuts will be implemented in September

US June’s data showed a less-than-expected rise in core inflation for the fifth consecutive month, even as Trump’s April tariff announcements augmented the cost of certain items. Waller predicts that the economy will “remain soft” for the remainder of 2025 after only growing at a slow 1% rate in the first six months.

Nevertheless, most investors believe the central bank will maintain interest rates as they are after the meeting this month. However, they expect the Feds to reduce rates later in September.

Waller, when asked about possible September rate cuts, said that any additional cuts beyond this month would entirely rely on incoming economic data. He said he prefers they start now, not waiting until the labor market plunges.

Waller is still being considered to be one of the possible successors to Fed Chair Jerome Powell, when his term ends. However, Waller stated he has not discussed the position with any administration officials.

President Donald Trump has been at odds with Powell for months now. He has consistently asked Powell to lower interest rates, but those calls have been dismissed. Recently, the Fed chair also came under fire over the renovation at the central bank’s headquarters. Some Republicans have accused Powell of excessive spending on the project, urging more investigations into the matter.

When asked to comment on the renovation issue, Waller noted that in his experience, construction projects often face similar challenges, emphasizing that while he wasn’t defending the situation, it wasn’t uncommon. He added that inflation had turned out to be much higher than anticipated when bids were made in 2017, stating that it’s clearly a factor.

Source: CryptoSlate