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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
This week’s fireworks in the gilts market, as investors fretted that the chancellor’s tears in the House of Commons portended her departure, marked the latest in what have become regular bouts of volatility in UK government bond prices.
After selling off with the pound on Wednesday afternoon when Sir Keir Starmer stopped short of giving Rachel Reeves his full backing, gilt prices recovered after the prime minister made fuller public expressions of support, saying Reeves would be chancellor for a “very long time to come”.
Ten-year borrowing costs fell back from their highs but, at 4.56 per cent, remained higher than before the episode. Investors said they continued to worry that measures to strengthen the public finances were becoming politically unachievable, after the U-turn on welfare reforms, and that risks to the stability of the government had been thrown into sharper relief.
It will be a “fine balancing act that on the one hand appeases the market, but on the other calms the rebels within the Labour party”, said Craig Inches, head of rates and cash at Royal London Asset Management. A move higher in global bond yields would again turn up the pressure on a gilts market that, though stable for now, remains tetchy. Ian Smith
Is China still facing deflation?
China has been battling deflationary pressures that are unlikely to abate in June, as weak domestic demand and an economic policy focused on production make their impact on prices.
The country’s National Bureau of Statistics will publish its June producer price index and consumer price index on Wednesday. The PPI, which tracks the prices of goods and services before they reach consumers, has been negative since October 2022. The CPI has been negative since February this year.
The average forecast in a Reuters poll has the June PPI falling 3.1 per cent year-on-year after a 3.3 per cent decline in May. The CPI is forecast to be flat on an annual basis after falling 0.1 per cent year-on-year in May.
One key driver of deflation is extreme price competition among domestic businesses. There are price wars in sectors ranging from electric vehicles to food delivery. High-level officials have become increasingly vocal against this trend, amid broader rhetoric against “involution” — a word describing the malaise brought about by ceaseless competition rendering one’s efforts increasingly worthless.
In a meeting last Tuesday chaired by President Xi Jinping and attended by Premier Li Qiang, officials stressed the need to “lawfully regulate low-price disorderly competition”.
This has stoked expectations of modest supply side reform, which could ease deflationary pressures. But until China meaningfully stimulates demand or reduces oversupply, inflation is likely to remain stubbornly low. William Sandlund
Will Fed minutes offer clues on the timing of its next rate cut?
Strong economic data is keeping pressure off the US Federal Reserve to cut interest rates at its next meeting at the end of this month and, although observers still expect at least one cut in 2025, it is unclear when the Fed might actually get around to lowering rates.
More insight on the Fed’s thought process will come on Wednesday with the release of the Federal Open Market Committee’s June meeting minutes. The Fed left the federal funds rate intact at last month’s meeting, as it has since it made a quarter-point cut in December.
The US Bureau of Labor Statistics reported on Thursday that the country’s economy had added about 147,000 jobs in June, well above the consensus forecast of 107,000. Traders responded by backing off bets that the FOMC would cut this month.
There is now a less than 5 per cent chance that the Fed cuts interest rates at its July 29-30 meeting, according to data from LSEG. The equivalent of two quarter-point rate cuts are expected by the end of the year, with the Fed set to meet again in September, October and December.
Economists at Morgan Stanley said recent data showed that the labour market remained too tight to expect the Fed to intervene in July.
“For the Fed, labour input is slowing gradually without creating significantly greater slack,” the MS economists said. “We do not think these data point to a cut in July, and we continue to think the combination of rising inflation from tariffs and a low unemployment rate will keep the Fed on the sidelines.”
Brian Rose, a senior US economist at UBS, pointed to a decrease in private payrolls in June as evidence that the Fed would probably cut later in the year, while agreeing that current data was too strong for a July reduction.
“However, the weakness in private payrolls, the participation rate, earnings, and sentiment surveys suggest that labour demand is deteriorating,” Rose said. Will Schmitt