Access the Editor’s Digest without any cost
Enjoy Roula Khalaf’s top picks in this weekly newsletter.
This week witnessed a surge in the gilts market, with concerns rising over the chancellor’s potential departure following emotional scenes in the House of Commons. This volatility in UK government bond prices is becoming a recurring trend.
After a dip alongside the pound when Sir Keir Starmer didn’t fully support Rachel Reeves on Wednesday, gilt prices rebounded when the prime minister expressed strong backing for Reeves, stating she would hold the chancellor position for a significant period.
Ten-year borrowing costs retreated from their peak but remained elevated at 4.56%, higher than pre-incident levels. Investors fear that achieving fiscal strengthening measures is becoming politically challenging, especially after the reversal on welfare reforms, heightening concerns about government stability.
According to Craig Inches, head of rates and cash at Royal London Asset Management, striking a balance between appeasing the market and pacifying dissent within the Labour party will be crucial. A surge in global bond yields could reignite pressure on the gilts market, which although stable currently, remains on edge. Ian Smith
Is China still grappling with deflation?
China continues to face deflationary challenges, driven by weak domestic demand and a production-centric economic policy impacting prices.
The National Bureau of Statistics is set to release the June producer price index and consumer price index this week. The PPI, reflecting pre-consumer prices, has been negative since October 2022, while the CPI turned negative in February this year.
Forecasts suggest a 3.1% year-on-year drop in the June PPI after a 3.3% decline in May. The CPI is expected to remain flat annually, following a 0.1% decrease in May.
Intense price competition among domestic businesses is a major driver of deflation, leading to price wars across sectors like electric vehicles and food delivery. High-level officials are increasingly critical of this trend, amidst broader concerns about “involution” caused by relentless competition devaluing efforts.
A recent meeting chaired by President Xi Jinping emphasized the need to regulate low-price competition, hinting at potential supply-side reforms to alleviate deflationary pressures. Until China revives demand or reduces oversupply, inflation is likely to persist at low levels. William Sandlund
Will Fed minutes shed light on the next rate cut timing?
Robust economic data has relieved pressure on the US Federal Reserve to cut interest rates at the upcoming meeting, with expectations of at least one cut in 2025. However, uncertainty surrounds the timing of rate reductions.
Insights into the Fed’s decision-making process will emerge from the June meeting minutes of the Federal Open Market Committee. Despite leaving the federal funds rate unchanged last month, strong job growth in June has dampened expectations of an imminent cut.
Market data indicates a less than 5% probability of a rate cut in the upcoming July meeting, with two quarter-point cuts anticipated by year-end. Economists at Morgan Stanley believe that the tight labour market doesn’t warrant immediate intervention in July, citing rising inflation from tariffs and a low unemployment rate as factors keeping the Fed cautious.
While acknowledging a likely rate cut later in the year, Brian Rose, a senior US economist at UBS, points to weakening private payrolls as a sign of deteriorating labour demand. Despite strong current data, indications of a slowdown in private payrolls, participation rates, earnings, and sentiment surveys suggest a need for future Fed action. Will Schmitt