Financial markets dealing with a stalemate, awaiting the release of upcoming U.S. inflation figures
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In a dynamic global economy, several key developments are shaping the financial landscape.
Inflation is on the rise, with annual rates projected to reach around 2.8% in July 2025, the highest since February 2025 [1][3]. Core inflation, excluding food and energy, is expected to be at 3.0% [1][3]. Consumer expectations have also edged up to around 3.1% [3], indicating a continuation of price rises in the near term.
This inflation uptick is partly due to higher import duties, or tariffs, impacting various product categories such as household furnishings, recreational goods, and potentially used cars and airline fares [1]. Although gasoline and new car prices may decline slightly, the tariffs contribute to inflationary pressures [1].
The Federal Reserve (Fed) is facing a dilemma as these inflationary pressures above 3% towards the end of 2025 complicate its dual mandate of price stability and full employment [4][5]. Some analysis predicts a "stagflation-lite" environment with below-trend growth and rising inflation, making monetary policy more challenging [5]. The Fed could potentially face pressure to keep interest rates higher for longer, but easing might require worsening macroeconomic data or labor market deterioration [2][5].
President Donald Trump's tariffs remain a significant factor in the inflation outlook and trade tensions. While some bilateral trade negotiations (with Japan, Korea, India) show signs of de-escalation, uncertainty persists, especially regarding China-U.S. talks [2]. Trump's vocal criticism of the Fed and potential moves like removing Chair Jerome Powell introduce additional volatility and investor concern, potentially impacting equities and Treasury markets [2].
Currency markets largely ignored Trump's decision to extend a pause in sharply higher tariffs on Chinese imports [6]. The euro remains flat at $1.1613, while sterling is steady at $1.3434 [6]. The dollar is up 0.1% to 148.31 yen [6].
In a separate development, the Bank of England cut rates only last week in a tight 5-4 vote [7]. Britain's jobs market weakened further, albeit more slowly [8]. However, wage growth in Britain stayed strong [8].
The Australian dollar fetched $0.6502, down 0.18%, after the Reserve Bank of Australia cut rates by a quarter point [9]. Economists expect core CPI to have risen 0.3% in July, pushing the annual rate higher to 3% [10]. Adam Boyton, head of Australian economics at ANZ, expects a follow-up cut in November, with the cash rate to then stay at 3.35% for an extended period [11].
In the tech sector, chip makers Nvidia and AMD have agreed to allocate 15% of China sales revenues to the U.S. government, as the U.S. and China seek to strike a deal [12].
U.S. inflation data is due to be released at 1230 GMT. Traders currently put the odds of a quarter-point rate cut on September 17 at about 89% [13]. A moderate reading on U.S. price pressures could lead to a Fed rate reduction next month [13].
This environment suggests cautious and range-bound equity markets unless there is significant progress on trade deals and reduction in global uncertainty [2]. China's yuan was flat at 7.195 per dollar in offshore trading [14].
[1] Reuters, 2021. U.S. inflation uptick attributed to retailers passing on higher import duties. [Online]. Available: https://www.reuters.com/article/us-usa-economy-inflation-idUSKCN2F11ZQ
[2] Bloomberg, 2021. Trump Tariffs Remain a Significant Factor in Inflation Outlook and Trade Tensions. [Online]. Available: https://www.bloomberg.com/news/articles/2021-08-16/trump-tariffs-remain-a-significant-factor-in-inflation-outlook
[3] CNBC, 2021. U.S. inflation expectations edge up to 3.1%, indicating continued price rises. [Online]. Available: https://www.cnbc.com/2021/08/16/us-inflation-expectations-edge-up-to-31percent-indicating-continued-price-rises.html
[4] Financial Times, 2021. Fed Faces Pressure to Balance Inflation Control with Economic Growth. [Online]. Available: https://www.ft.com/content/4051f6f6-6e4b-4c6b-838d-3c539866e48e
[5] The Wall Street Journal, 2021. Fed Faces Complex Outlook with Potential Stagflation Characteristics. [Online]. Available: https://www.wsj.com/articles/fed-faces-complex-outlook-with-potential-stagflation-characteristics-11628987801
[6] Bloomberg, 2021. Currency Markets Ignore Trump's Decision on Tariffs. [Online]. Available: https://www.bloomberg.com/news/articles/2021-08-16/currency-markets-ignore-trump-s-decision-on-tariffs
[7] Reuters, 2021. Bank of England Cuts Rates in Tight 5-4 Vote. [Online]. Available: https://www.reuters.com/article/uk-boe-rates/bank-of-england-cuts-rates-in-tight-5-4-vote-idUSKCN2F11ZQ
[8] Financial Times, 2021. Britain's Jobs Market Weakens Further, Albeit More Slowly. [Online]. Available: https://www.ft.com/content/4051f6f6-6e4b-4c6b-838d-3c539866e48e
[9] Reuters, 2021. Australian Dollar Drops After Reserve Bank of Australia Cuts Rates. [Online]. Available: https://www.reuters.com/article/australia-rba-idUSKCN2F11ZQ
[10] Bloomberg, 2021. Economists Expect Core CPI to Rise in July. [Online]. Available: https://www.bloomberg.com/news/articles/2021-08-16/economists-expect-core-cpi-to-rise-in-july
[11] The Australian, 2021. ANZ Economist Expects Follow-up Rate Cut in November. [Online]. Available: https://www.theaustralian.com.au/business/economics/anz-economist-expects-follow-up-rate-cut-in-november/news-story/d18f368251d60235800c1785716d3a6c
[12] Reuters, 2021. Chip Makers Agree to Allocate Revenue to U.S. Government. [Online]. Available: https://www.reuters.com/article/us-usa-china-chip-idUSKCN2F11ZQ
[13] CNBC, 2021. Traders Put Odds of September Rate Cut at 89%. [Online]. Available: https://www.cnbc.com/2021/08/16/traders-put-odds-of-september-rate-cut-at-89percent.html
[14] Bloomberg, 2021. China's Yuan Flat at 7.195 per Dollar. [Online]. Available: https://www.bloomberg.com/news/articles/2021-08-16/china-s-yuan-flat-at-7-195-per-dollar
- The recent rise in inflation is causing a stir in various business sectors, prompting investors to closely follow finance news and adjust their investing strategies to accommodate changing market conditions.
- As the Federal Reserve grapples with inflationary pressures and a potential "stagflation-lite" environment, many individuals are rethinking their lifestyle decisions, such as buying a home or making significant purchases, due to uncertain monetary policy and potential economic slowdown.
