The Context: Divergent Views Amidst Economic and Political Crosscurrents
The past week – marked by a heavy schedule of data releases, high-level meetings, and official statements – did little to reconcile fundamental differences of opinion on issues with systemic implications for the global economy. These spanned important areas from the outlook for the US economy and the appropriate monetary policy response to the looming question of the Federal Reserve’s next leadership, the evolving China-US tariff situation, and the resolution of major conflicts around the world.
US economic data painted a mixed picture. Softer-than-expected CPI inflation and solid retail sales figures contrasted with hotter-than-expected PPI inflation and somewhat stagflationary UMich sentiment indicators. This data tug-of-war intensified the spotlight on the divergent public statements regarding the Federal Reserve’s appropriate course of action – ranging from the administration’s call for “jumbo cuts” starting next month to more cautious pronouncements from Fed officials. Meanwhile, on the trade front, President Trump signed an Executive Order extending the “pause” on higher tariffs until November 10th, citing a “very good” relationship with President Xi.
In China, both retail sales and industrial production fell short of consensus forecasts. Such disappointment across both supply and demand indicators serves as another stark warning that the economy risks remaining in a “muddled middle,” lacking a decisive breakthrough, either on short-term stimulus or, more critically, in efforts to structurally revamp the growth model. Conversely, in Europe, economic activity measures for both the Eurozone and the UK came in better than expected, offering a glimmer of regional resilience at a time of persistent concerns about the outlook for productivity.
Global markets continued to be boosted by strong risk-taking sentiment. This was reflected not only in new record highs for stock markets around the world but also in historically low risk spreads for investment-grade, high-yield, and emerging market bonds. Yields on government debt rose, led by Europe, while the dollar and oil traded within a relatively tight range.
The Week Ahead: Washington Remains Center Stage, Jackson Hole Looms
The coming week promises a significant focus on official Washington. Following Friday’s Alaska summit with Russian President Putin, President Trump is set to host Ukrainian President Zelensky and other European leaders at the White House on Monday.
The other main official focal point will be the annual central bankers’ meeting in Jackson Hole. While the official theme of this gathering is the functioning of the labor market, the primary interest will undoubtedly gravitate towards Fed Chair Powell’s expected unveiling of the new monetary policy framework – the strategy to meet its dual mandate – and any hints on the future evolution of monetary policy. While the appropriateness of the inflation target has been explicitly ruled out by Powell, there is hope that, this time around, the Fed will manage to avoid the fate of its last framework review five years ago, whose backward-looking modifications were essentially “dead on arrival.” Expect discussions around central bank independence to also feature prominently at Jackson Hole, particularly in ECB President Christine Lagarde’s widely-followed remarks.
It’s a relatively light week for primary US data, with the housing market as the main attraction. Elsewhere, look for key CPI inflation and PMI numbers for both the Eurozone and the UK, as well as retail sales for the latter.
Canada will issue its inflation data, while the New Zealand central bank is widely expected to cut rates, citing a weakening labor market. Japan is also scheduled to release its inflation numbers at a time of mounting pressures on the Bank of Japan to tighten monetary policy, adding another element to global monetary policy divergence.
Among a significant amount of data from Latin America, two releases particularly stand out: Argentina’s economic activity for June and the extent to which the ongoing US tariff uncertainties have influenced similar data from Mexico.
