Inflation Falls Sharply as Britain Gets a New Prime Minister.
Summary
US inflation fell far more than expected in June, with the monthly decline the largest since April 2020 and core price growth easing to its slowest pace in months
Kevin Warsh used his first congressional testimony to reject any suggestion that the inflation fight is won, declining once again to signal the Fed's next move
Andy Burnham becomes Prime Minister today, with Shabana Mahmood expected at the Treasury; sterling rallied against the euro last week as her appointment appeared confirmed
The European Central Bank meets on Thursday, with a hold widely expected after eurozone inflation eased in June
Markets have spent much of this year braced for inflation to spiral, and last week delivered the clearest evidence yet that the worst may have passed. American consumer prices posted their steepest monthly fall in more than six years, driven by the collapse in energy costs that followed the mid-June ceasefire. The relief may prove temporary given the renewed hostilities that have since pushed oil higher again, but the immediate effect was to take the pressure off a Federal Reserve that had been edging towards tightening. In Britain, the political transition that has unsettled markets for months reaches its conclusion today as Andy Burnham enters Downing Street.
The dollar came under pressure after the June inflation report undershot expectations across the board. Both headline and core measures came in below forecast, with the monthly decline in consumer prices the largest recorded since the early months of the pandemic. Energy costs did the heavy lifting, but the detail was encouraging beyond that, with services prices flat and shelter inflation slowing to a crawl. Traders responded by scaling back the probability of a rate rise later this year. Kevin Warsh, appearing before Congress the same morning for his first testimony as Chair, was careful not to endorse that shift. He described the figures as a single data point and said explicitly that he did not regard the inflation fight as won. Consistent with his approach since taking office, he offered no guidance on what the Fed will do when it meets next week.
Sterling was the standout performer, climbing to a one-year high against the euro as reports emerged that Shabana Mahmood would be appointed Chancellor. Markets regard her as a fiscal conservative, and the prospect of her at the Treasury rather than a more expansionist alternative eased the concern that has hung over UK assets since the leadership contest began. Andy Burnham formally becomes Prime Minister today, having recommitted to the government's existing fiscal rules. The economic backdrop he inherits is more encouraging than expected. Monthly output returned to growth in May after April's contraction, and the economy expanded at roughly double its trend rate over the three months to May, placing Britain at or near the top of the G7 growth table. That resilience, combined with inflation still above target and two members of the Monetary Policy Committee already voting for higher rates, makes the Bank of England's decision on 30 July a live one.
The euro lost ground against sterling and has struggled to find direction more broadly. The European Central Bank meets on Thursday and is widely expected to leave rates unchanged, having raised them in June for the first time since 2023. Eurozone inflation fell back in June, easing the pressure for another move and shifting attention to September as the more likely date for any further tightening. The focus on Thursday will be on President Lagarde's press conference and whether the recent moderation in price growth has altered the balance of risks as the Governing Council sees it. With the energy picture unsettled once again, the ECB is unlikely to close the door entirely.
Events to Watch This Week:
Tuesday 21 July: UK labour market data (June)
Wednesday 22 July: UK CPI (June)
Thursday 23 July: ECB rate decision and press conference
Friday 24 July: UK retail sales (June); flash PMIs for the UK, eurozone and US
Wednesday's UK inflation figures are the most significant domestic release of the week, landing eight days before a Bank of England decision that markets consider genuinely open. Thursday's ECB meeting follows. Speak to the Orbis dealing team ahead of both to ensure your upcoming transfers are protected.
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